Euro Vulnerable to Deeper Losses on Draghi Comments, PMI Data

Talking Points:

• Euro May Extend Decline on Dovish Draghi Comments, Soft PMI Data
• Aussie and NZ Dollars Rise, Euro and Yen Decline as Risk Firms in Asia
• Confirm Trend Direction and Spot Critical Reversals with DailyFX SSI

The sentiment-linked Australian and New Zealand Dollars continued to push higher after scoring dramatic gains in the preceding 24 hours, rising alongside Asian stock prices as risk appetite continued to recover around the financial markets. The anti-risk Euro and Japanese Yen traded lower, with the single currency underperforming in the aftermath of yesterday’s dovish ECB policy announcement (as expected).

Eurozone event risk remains in the spotlight through the end of the trading week. ECB President Mario Draghi is set to speak at the World Economic Forum in Davos, Switzerland. Traders will look for the central bank chief to expound on yesterday’s dovish commentary, where he hinted that an expansion of stimulus measures may be unveiled as soon as March.

Most critically, investors will want to know if the ECB is prepared to deliver more accommodation in the immediate term. December’s move to extend the length of the QE program added to the sum total of asset purchases but didn’t change the size of monthly outlays. Meanwhile, the shallow cut of the deposit rate fell in line with what investors had already priced prior to the policy meeting. On balance, this meant that present-day stimulus provision was left static, leaving investors disappointed.

On balance, this means that for any further policy support to be seen as adequately potent by investors, the ECB will have to actually increase the amount of easing on offer now versus in the future. Comments hinting at such a possibility from Mr Draghi are likely to weigh on the Euro and may amplify the recovery in risk appetite. Rhetoric pointing to another modest offering as the next policy step stands to yield the opposite results.

The preliminary set of January’s Eurozone PMI figures is likewise on tap. The region-wide composite measure is expected to show that manufacturing- and service-sector activity growth slowed for the first in four months in December. Needless to say, sagging economic growth compounds downward pressure on inflation and makes it harder for the ECB to deliver on its mandate, amplifying the need for a more aggressive stimulus effort. As such, a soft result will probably hurt the single currency, whereas an upside surprise may help cap recent losses.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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