Recent Euro move unwinds after negative sentiment from Draghi at ECB speech

Tom Tong08/Feb/2013Currency Updates

EUR

The euro was poised for its biggest five-day drop in seven months after European Central Bank President Mario Draghi said recent currency gains may slow inflation and growth, damping demand for the region’s assets.

The 17-nation currency was 0.3 percent off a two-week low against the greenback as European Union leaders meet to seek agreement on the 2014-2020 budget. There are downside risks to inflation “stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate,” according to a statement of Draghi’s remarks yesterday placed on the ECB’s website.

The central bank kept its benchmark rate at a record-low 0.75% however Draghi re-iterated that the exchange rate was near to its long-term average, and made it clear that he wants to see whether the appreciation is sustained and will alter the risk assessment as far as price stability is concerned. A promised EU investment budget to modernize the recession- hit economy is set to be scaled back amid competing national demands. These comments predominantly sent the euro falling against the dollar amidst the door being opened for possible policy action.

GBP

Yesterday we heard from the soon to be Bank of England head in July Mark Carney. Contrary to what investors had expected, Carney didn’t propose any radical changes for the BOE when he testified before the Treasury Select Committee yesterday. He noted that the use of flexible inflation targets has been working quite well for Canada and the U.K. and added that “the bar for alteration is very high.”

As for the BOE rate statement, it came in just as expected, with no changes made to monetary policy at 0.50% interest rate and 375 billion pound asset purchases.

Short term, it looks like Carney won’t be applying sweeping changes and will use the same monetary policy tools that the BOE is currently using once he assumes the mantle in July causing the pound to claw back some much needed respite against the euro.

In other news, manufacturing production climbed 1.6% in December (versus 0.7% forecasts), leaving investors hopeful that the U.K. will avoid a third recession.

USD

For the dollar, it was much more a question of taking advantage of euro weakness rather than dollar strength.Due to relatively better-than-expected U.S. data and risk aversion across the markets, the dollar was able to correct some of its intra week losses against its counterparts.
,Draghi’s comments on the current strength on the euro weighed on the common currency. It was enough to cause investors to put their money back into the safe-haven currency.

The U.S. data released yesterday was widely received as better-than-expected. Though the initial jobless claims clocked in at 366,000 instead of 361,000, the consumer credit and quarterly labor costs exceeded expectations.

At 1.30pm GMT today we have the trade balance numbers. The U.S. trade deficit is expected to drop from 48.7 billion USD to 45.7 billion USD, but other than that based on the multitude of data/sentiment released yesterday, today’s economic calendar is relatively quiet in comparison.

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Written by Tom Tong

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