Euro Hit by Draghi’s Dovishness not Jawboning
City Index February 7, 2013 9:30 PM
<p>Euro drops $1.5 cent after Draghi maintained a largely dovish tone, stating that growth risks remain on the downside and anticipating inflation to fall below […]</p>
Euro drops $1.5 cent after Draghi maintained a largely dovish tone, stating that growth risks remain on the downside and anticipating inflation to fall below its 2.0% in coming months.
Draghi’s comments on the euro attributed its appreciation to a sign of confidence in the euro, while adding the central bank will monitor the currency for its assessment on price stability.
EURO HIT BY DRAGHI’s DOVISHNESS NOT JAWBONING
The clearest indication that the euro sell-off was caused by Draghi’s dovishness rather than jawboning (concern with euro appreciation) is the resulting DECLINE in sovereign bond yields.
While the euro fell more than 1.0% from its pre-Draghi levels, peripheral bond yields are hardly changed due to the dovish delivery from the ECB president. In fact, the 10-year yields on Italy and Spain sovereign bonds fell by 5-7 basis points before edging back up once the intensified euro sell-off weighed on overall risk appetite including the 0.6%-0.9% decline in US and European equities.
GOING FORWARD, if the appreciation in the euro exchange rate continues to rise to the extent of diverging from real interest rates, then the ECB may begin shedding light on FX valuations and their fundamental implications.
Euro’s uptrend remains intact, with support underpinned at $1.3280, forming a channel from the July lows. We continue to expect a revisit of the $1.37 cycle high, before accumulating momentum towards $1.40 before end of Q1.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.