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Did Financial Markets Misunderstand ECB President Draghi?

Did Financial Markets Misunderstand ECB President Draghi?

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Commodity Dollars rise, Yen slumps as risk appetite firms in Asia
  • Risk-on mood may reflect re-evaluation of new ECB policy regime
  • S&P 500 futures hint sentiment rebound to continue into week-end

Risk appetite trends shaped FX market price action in overnight trade. The sentiment-geared Australian, Canadian and New Zealand Dollars traded higher alongside stock prices while the anti-risk Japanese Yen underperformed. The MSCI Asia Pacific regional benchmark equity index rose 0.8 percent as markets digested yesterday’s ECB monetary policy announcement.

The central bank delivered an aggressive stimulus boost but an initially positive market reaction soured after President Mario Draghi suggested negative deposit rates had reached a floor. Traders appeared to take that to mean the ECB is out of ammunition. Draghi explicitly said the bank’s focus will shift from rates to unconventional easing however, meaning he was not signaling that further measures are out of the question.

With that in mind, overnight price action may reflect traders’ re-evaluation of the ECB President’s remarks and the subsequent conclusion that the risk-off push triggered during his press conference was ill-conceived. S&P 500 futures are pointing decidedly higher, hinting that the chipper mood may continue into the week-end. The economic calendar is relatively thin, offering few roadblocks to established momentum.

Meaningful trend development seems unlikely however. Traders are probably too shell-shocked after breakneck volatility in the wake of surprising RBNZ and ECB meeting outcomes to commit to a strong bias ahead of next week’s FOMC policy announcement. Indeed, even an as-expected BOC rate decision drove sharp price swings, underscoring sentiment’s sensitivity to policy trends.

Are markets behaving as DailyFX expected so far in 2016? See our annual forecast to find out!

Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

21:30

NZD

BusinessNZ Manufacturing PMI (FEB)

56.0

-

58.0

21:45

NZD

Food Prices (MoM) (FEB)

-0.6%

-

2.0%

23:32

NZD

REINZ House Sales (YoY) (FEB)

5.7%

-

4.3%

23:50

JPY

BSI Large All Industry (QoQ) (1Q)

-3.2

-

4.6

23:50

JPY

BSI Large Manufacturing (QoQ) (1Q)

-7.9

-

3.8

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

07:00

EUR

German CPI (MoM) (FEB F)

0.4%

0.4%

Medium

07:00

EUR

German CPI (YoY) (FEB F)

0.0%

0.0%

Medium

07:00

EUR

German CPI - EU Harmonized (MoM) (FEB F)

0.4%

0.4%

Low

07:00

EUR

German CPI - EU Harmonized (YoY) (FEB F)

-0.2%

-0.2%

Low

09:30

GBP

Visible Trade Balance (£/Mn) (JAN)

-10300

-9917

Medium

09:30

GBP

Trade Balance Non EU (£/Mn) (JAN)

-2650

-2357

Low

09:30

GBP

Trade Balance (£/Mn) (JAN)

-3000

-2709

Low

09:30

GBP

Construction Output (MoM) (JAN)

0.2%

1.5%

Low

09:30

GBP

Construction Output (YoY) (JAN)

-1.7%

0.5%

Low

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EUR/USD

1.0281

1.0677

1.0927

1.1073

1.1323

1.1469

1.1865

GBP/USD

1.3841

1.4040

1.4160

1.4239

1.4359

1.4438

1.4637

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

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

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