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The Euro Catalyst That Outshined the ECB

The Euro Catalyst That Outshined the ECB

Kathy Lien, Technical Strategist

It was the vote of confidence for Italian Premier Enrico Letta that caused EURUSD to surpass the stubborn 1.36 resistance level today, not the ECB policy statement, as some expected.

The European Central Bank (ECB) monetary policy decision may have been the most important event risk on the economic calendar today, but it was the confidence vote in Italy that ultimately sent EURUSD above 1.36. The euro (EUR) rose to its strongest level in seven months this morning after Italian Premier Enrico Letta won the confidence vote, and despite cautious comments from ECB President Mario Draghi, the euro managed to hold onto its gains.

See related: A Noteworthy EUR/USD Move That’s Possible Today

Italy's political crisis has been threatening the stability of the Eurozone for the past few months, and Letta's victory means that the controversy is finally coming to an end, removing a major risk for the EURUSD and other euro crosses. The euro also avoided a selloff when ECB President Draghi failed to directly mention LTRO in today’s post-meeting press conference.

Earlier this morning, Silvio Berlusconi gave up his attempt to bring down Italy’s coalition government by saying he would vote for Letta. Over the weekend, Berlusconi received widespread criticism for asking five ministers from his People of Freedom (NFP) party to turn in their resignations.

With the embattled Berlusconi’s expulsion vote scheduled for Friday, this was his last-ditch effort to affect the vote’s outcome. However, senior officials in Berlusconi’s own party rejected his brash efforts and instead threw their support behind Letta. This was the first time in two decades that Berlusconi's party has turned on him, and this outcome represents not just a victory for Letta, but one for the euro as well.

No New Stimulus from the ECB

Elsewhere in the Eurozone, there's no question that the ECB remains dovish, but at this stage, the central bank is in no rush to increase stimulus. During his press conference this morning, ECB President Draghi acknowledged that confidence and survey indicators have been improving, but he also felt that the risks are to the downside.

Like other central bank leaders, he expressed specific concerns about the US government shutdown and the impact it could have on the US and global economy if it lasts for more than a few days.

While Draghi said the Eurozone is more resilient now than before, he called the recovery weak, fragile, and uneven. As a result, the ECB feels that monetary policy should remain accommodative at present or lower levels for an extended period of time. The Bank is, however, ready to consider all instruments, including a rate cut—which was discussed today—if the region’s economy were to weaken further. None of Draghi’s comments were particularly new, which was why the euro shrugged off the dovish bias.

A Surprise Shortfall for the US Labor Market

Meanwhile, US private sector payrolls grew less than expected in the month of September. Economists had been looking for the ADP employment change to rise from 176k to 180k, but instead, US companies added only 166k jobs to their payrolls, up from a downwardly revised 159k.

Based on these numbers alone, the Federal Reserve appears right to have deferred tapering of asset purchases, but we will have to wait for the next non-farm payrolls (NFP) report to confirm that job growth slowed in the month of September because the ADP report can often over- or undershoot NFPs.

Here’s the problem, though: If the US government remains shut down on Friday, the NFP report will not be released until the shutdown ends and the Bureau of Labor Statistics and other agencies re-open.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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