Verbal Intervention In Full Force
We’ve previously discussed how verbal intervention by central bankers can impact the markets and this week has been a prime example. Earlier in the week, ECB chief Mario Draghi lit a fire under the Euro during his comments made at the ECB Forum in Sintra. The ECB chief struck a far more positive tone than in the week prior during the very balanced press conference that followed the ECB meeting.
This time around Draghi noted that “as the economy continues to recover, a constant policy stance will become accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged”.
What Does It Mean?
To summarise this, Draghi is saying that if prices continue to rise as the ECB forecast them to into 2018, then ECB policy will become more accommodative as inflation increases. Furthermore, Draghi noted that “all the signs now point to a strengthening and broadening recovery in the Euro area” adding also that “deflationary forces have been replaced by reflationary ones”. Draghi also noted that the risks of “hysteresis effects” were diminished and that the bank can “now be confident that our policy is working and that those risks have abated”.
ECB Policy On The Turn
The speech can be viewed as a departure away from the traditional “whatever it takes” approach, to more of an “it will take less” perspective; marking the start of the turn towards tighter monetary policy. Today is the final day of the forum, and notably, at 1.30pm BST, there will be a policy panel featuring BOE’s Carney, BOJ’s Kuroda and BOC’s Poloz which will be closely watched by traders.
Draghi possibly underestimated the market reaction to the speech which triggered one of the biggest global market moves since the Trump election. The ECB has long suffered the wrath and changeable-tide of investor expectations and yesterday was no different with EURUSD seeing its largest one-day gain since the 5th of December, 2016. The moves were even more explosive on the crosses with EURNZD alone spiking higher by over 370 pips on the day. Markets have been fairly stagnant over recent months as volatility and momentum have contracted, and traders will now be looking to capitalise on what could be the start of a new trending move.
EURUSD is now quickly approaching a key pivot level. The 1.14-1.1450 level has capped EURUSD upside on several occasions over the last few years, having only broken above the level twice and reversing in both instances. A test of the level has usually provoked sharp bearish rhetoric from the ECB which sent the currency lower, so traders will be watching eagerly as price approaches the level.
We also have some key technical confluence ay the level with the bearish trend line from 2015 highs coinciding with the ABCD symmetry swing which is measured in length against the rally from November 2015 lows to May 2016 highs. This is a major pivot level, and the reaction here will be crucial in determining the pair’s direction.
Yellen Exacerbates US Equities Sell-Off
Although the main focus yesterday was on the ECB chief, we also had comments from Fed Chairwoman Yellen who was speaking in London on global economic issues. Although the speech was mostly benign, the chairwoman did cause a late move lower in US assets noting that asset valuations were “somewhat rich” by some metrics.
However, US markets were already on the backfoot, firstly following news that the healthcare legislation vote will be suspended until after July 4th and secondly, in response to news of a major global cyber-attack which has affected both government and corporate systems.