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Dovish Central Banks Commentaries Facilitate Euro and Sterling Tumbles Amidst Thin Liquidity

Dovish Central Banks Commentaries Facilitate Euro and Sterling Tumbles Amidst Thin Liquidity

Kevin Jin,

THE TAKEAWAY: ECB and BOE maintain benchmark rates > EURUSD dips below $1.2900

Market liquidity is thin today while Americans are celebrating Independence Day. However there is no shortage of market moving events. Within a 45-minute period, both the Bank of England (BoE) and European Central Bank (ECB) announced that they would maintain their benchmark rates. The Bank of England released a policy statement which remarked, “… in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.” This was the first meeting under new BoE Governor Mark Carney’s leadership, and the aforementioned statement indicates a dovish posture. On the European side, ECB President Mario Draghi provided dovish commentary as well. Draghi stated that the monetary stance will remain accommodative for as long as necessary. Draghi also commented that the ECB Governing Council unanimously decided to issue forward guidance regarding low rates. Both the GBPUSD and EURUSD declined heavily after their respective announcements.

Bond yields in the Eurozone periphery were large beneficiaries of Draghi’s commitment to rates low. 10YR Italian government bond yields decreased -10.7bps (-2.38%) to 4.386% at the time of writing. 10YR Spanish bond yields declined -12.4bps (-2.611%) to 4.624% at the time of writing. Looking over at FX markets, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) gains +38 (+0.34%) to 10900 at the time of writing.

AUDUSD 15-minute Chart: July 4, 2013

Dovish_Central_Banks_Commentaries_Facilitate_Euro_and_Sterling_Tumbles_Amidst_Thin_Liquidity_body_Picture_4.png, Dovish Central Banks Commentaries Facilitate Euro and Sterling Tumbles Amidst Thin Liquidity

Charts Created using Marketscopeprepared by Kevin Jin

The AUDUSD is higher today by +0.65% at the time of writing. The AUDUSD slowly climbed up the entire day past $0.9100 with little resistance. Recall that markets are trading thinly today because of the US holiday so volatility will likely pick up tomorrow ahead of the US NFP data.

GBPUSD 15-minute Chart: July 4, 2013

Dovish_Central_Banks_Commentaries_Facilitate_Euro_and_Sterling_Tumbles_Amidst_Thin_Liquidity_body_Picture_3.png, Dovish Central Banks Commentaries Facilitate Euro and Sterling Tumbles Amidst Thin Liquidity

Charts Created using Marketscopeprepared by Kevin Jin

The chart above shows the rapid decline in the GBPUSD the moment the Bank of England indicated its dovish stance on rates. The pair quickly fell over 100 pips and currently remains below the $1.5100 level at the time of writing.

EURUSD 15-minute Chart: July 4, 2013

Dovish_Central_Banks_Commentaries_Facilitate_Euro_and_Sterling_Tumbles_Amidst_Thin_Liquidity_body_Picture_2.png, Dovish Central Banks Commentaries Facilitate Euro and Sterling Tumbles Amidst Thin Liquidity

Charts Created using Marketscopeprepared by Kevin Jin

Similar to the cable, the EURUSD also experienced sharp declines resulting from central bank rhetoric. The EURUSD showed little reaction when the initial announcement was made that rates would stay steady. However during Draghi’s press conference, the EURUSD started to tumble.

USDJPY 15-minute Chart: July 4, 2013

Dovish_Central_Banks_Commentaries_Facilitate_Euro_and_Sterling_Tumbles_Amidst_Thin_Liquidity_body_Picture_1.png, Dovish Central Banks Commentaries Facilitate Euro and Sterling Tumbles Amidst Thin Liquidity

Charts Created using Marketscopeprepared by Kevin Jin

The USDJPY is trading range-bound today between ¥99.50 and 100.00. The pair did break above 100.00 during Draghi’s press conference but did not have much steam to push further afterwards. Tomorrow’s NFP data will likely have a large influence on the next major move in this pair.

--- Written by Kevin Jin, DailyFX Research

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

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