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Euro Volatile but Rallies Higher on Positive and Hawkish Draghi

By , Currency Strategist
07 March 2013 14:25 GMT

THE TAKEAWAY: EUR European Central Bank Press Conference > President Draghi Cuts Euro-zone Growth and Inflation Forecasts, but Issues Hawkish Tone > EURUSD BULLISH

The European Central Bank kept its key interest rate on hold at 0.75% today, but the big news was the tone that President Mario Draghi struck at the accompanying press conference. Although the ECB downgraded the region’s growth forecasts for 2013 to -0.9% to -0.1%, and for 2014 to 0.0% to +2.0%, and despite the fact that the inflation forecasts were downgraded for 2013 to +1.2% to +2.0%, and for 2014 to +0.6% to +2.0% (all yearly rates), President Draghi said that “later in 2013 economic activity should gradually recover.” Despite the very evident contradiction here – lowering growth forecasts yet claiming growth would rebound – the EURUSD has found itself bid higher on the news.

Also fueling the Euro’s quizzical rally has been the ECB’s ardent refusal to cut its key interest rate, which President Draghi addressed by saying that the “prevailing consensus was to leave the rates unchanged.” The commentary, in context of tightening credit conditions (as evidenced by the rising Euribor-3M rate, the rate at which Euro-zone banks lend unsecured funds to one another) and diminishing economic activity (as evidenced by significantly weaker PMI Manufacturing and Services readings across the continent, as well as the softer inflation readings which suggest aggregate demand is falling), seems rather off base.

EURUSD 5-minute Chart: March 7, 2013

Euro_Volatile_but_Rallies_Higher_on_Positive_and_Hawkish_Draghi_body_Picture_1.png, Euro Volatile but Rallies Higher on Positive and Hawkish Draghi

Charts Created using Marketscope – Prepared by Christopher Vecchio

Despite the contradictions littered about the ECB press conference, the EURUSD rallied after an initial dip to 1.2990 from 1.3025, to as high as 1.3090, at the time this report was written. With the USDJPY strengthening on the back of improved weekly claims data, the EURJPY was also quite strong, rallying from near 122.90 to as high as 123.70.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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07 March 2013 14:25 GMT