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Euro Declines as ECB President Draghi Switches Back to a Dovish Tone

Euro Declines as ECB President Draghi Switches Back to a Dovish Tone

Benjamin Spier, Technical Strategist

THE TAKEAWAY: ECB’s Draghi says economy to continue to weaken in start of 2013 -> Remarks notably more dovish than January -> Euro drops back below 1.3500

The Euro fell as much as 125 points against the US Dollar, as European Central Bank President Mario Draghi took a more pessimistic and dovish tone when talking about the European economy at his monthly press conference. The press conference followed the ECB’s decision to keep the interest rate at 0.75%, which Draghi said was a unanimous decision.

Regarding the recent appreciation in Euro trading, Draghi only said that that the central bank will be watching for theeffects the appreciating Euro has on inflation risks. The ECB President also said that Euro appreciation shows confidence in the Euro-area, and exchange rates should reflect fundamentals.

Draghi said that based on available data, he sees continued weakness in the fourth quarter of 2012 and the beginning of 2013. He reiterated that a Euro-zone recovery will begin later in 2013, but refused to specify which quarter he meant specifically. Draghi said that the central bank expects inflation to drop below 2% in the coming months, following the fall to the ECB’s 2% target in January.

Due to the lower inflation, Draghi said the ECB maintains an accommodative stance. However, Draghi added that the central bank has not changed its position on negative rates.

Finally, referring to the recent better-than-expected early payments of the ECB’s LTRO loans to European banks, Draghi said that repayment of the LTRO is a sign of confidence.

Draghi’s comments about continued economic weakness and an accommodative policy were perceived by the markets as more dovish than his January remarks, which led to the EUR/USD decline below 1.3500 for the first time in 8-days. The 1.3500 level may now continue to provide resistance, and support may now be provided by a previous resistance line around 1.3374.

EURUSD Daily: February 7, 2013

Euro_Declines_as_ECB_President_Draghi_Switches_Back_to_a_Dovish_Tone_body_eurusd_daily_chart.png, Euro Declines as ECB President Draghi Switches Back to a Dovish Tone

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to instructor@dailyfx.com .

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

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