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Why EURO Broke Support Despite ECB Optimism

  • Kathy Lien
  • 27 April 2018

Daily FX Market Roundup 04.26.18

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

 

The euro went on a wild ride today after the European Central Bank's monetary policy announcement.The single currency shot up to a high of 1.2210 as Mario Draghi expressed his confidence in the economy but when the press conference ended, it began a deep slide that erased all of its post ECB gains and took EUR/USD below 1.2100 to its the weakest level in 3 months.The euro went on a wild ride today after the European Central Bank's monetary policy announcement.The single currency shot up to a high of 1.2210 as Mario Draghi expressed his confidence in the economy but when the press conference ended, it began a deep slide that erased all of its post ECB gains and took EUR/USD below 1.2100 to its the weakest level in 3 months.

The euro simply couldn't overcome the dollar's strength as the move coincided with a broad based rally in the greenback.Nonetheless, after leaving interest rates unchanged, ECB President Draghi was surprisingly upbeat during his press conference. He downplayed the recent deterioration in data and talked primarily about their confidence in their outlook for solid, broad based growth and their view that inflation will converge towards their goal. He saw the downside risks as mostly global and the unexpected declines in data to be temporary because they are "still above historical averages" and Draghi also felt that there is less exchange rate volatility. While he refrained from discussing their monetary policy plans including the end of asset purchases, it is clear that the ECB's goal today was to reaffirm their confidence in the economy which should have driven EUR/USD higher and not lower.

The decline in Treasury yields should have also lifted the pair but German rates fell more than U.S. rates, so the yield spread favored EUR/USD weakness.At the end of the day the ECB will not be raising interest rates until 2019 whereas the Fed could lay the groundwork for a June rate hike when they meet next week. So in a nutshell, EUR/USD broke below 1.2150 support despite the ECB's optimism because it failed to overcome the dollar's strength, because the yield spread still favors EUR/USD weakness and because in many ways, ECB policy will trail well behind the Fed this year.

The U.S. dollar held onto its gains, shrugging off the decline in Treasury yields. U.S. data was better than expected with jobless claims falling to its lowest level in 49 years.A large part of the decline was due to spring break seasonality but the less volatile 4 week moving average also fell to 229K from 231K. Durable goods orders rose 2.6%, against expectations for 1.6% increase while the trade deficit shrank to -$68B from -$75.9B. First quarter GDP numbers are scheduled for release tomorrow and while investors are positioning for a strong report, the drop in non-defense capital goods orders, the stagnation in durable goods ex transportation, weakness in retail sales at the start of the year points to a softer release. Therefore if GDP falls short of expectations, we could see end of week profit taking in the greenback.  

The Bank of Japan has a monetary policy announcement this evening and will be releasing a barrage of economic reports including CPI, jobless rate, industrial production and retail sales.The BoJ firmly believes in the need for easy monetary policy so no changes are expected but they will be releasing their latest economic projections including their first forecasts for 2020.

Like the euro, sterling gave up its earlier gains to end the day unchanged versus the greenback.First quarter UK GDP numbers are also scheduled for release on Friday. This is most important piece of U.K. data on the calendar this week and it is expected to show growth slowing in the first 3 months of the year. However with trade and retail sales activity improving, we believe that the risk is to the upside for this report. The U.K. government also held a debate today on whether Britain should remain in a customs union. Interior Minister Amber Rudd casted doubt on May's plan to leave the union as he's worried that it would hurt Britain's ability to sign its own trade agreements. No vote was held but this is a lead-up to a binding vote in May or June.

The Canadian and New Zealand dollars ended the day lower against the greenback while the New Zealand dollar finally stopped falling after 7 days of extensive weakness.No data was released but tonight, New Zealand's trade balance and Australia's producer price reports are on the calendar. The downtrend for all 3 commodity currencies remain intact, so today's recovery is still nothing more than relief rally for the time being.

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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