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Euro May Have Further to Fall as Draghi Keeps Markets Guessing

Euro May Have Further to Fall as Draghi Keeps Markets Guessing

2016-10-25 17:25:00
Martin Essex, MSTA, Analyst
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Talking points:

  • The ECB President continues to keep the markets wondering whether its bond-buying program will be tapered or extended
  • Mario Draghi gave little further insight into Eurozone monetary policy in a speech in Berlin
  • Without a timetable for Taper, Euro will struggle to regain ground

See the DailyFX Analysts' 4Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

There was little to lift the Euro in the latest speech by European Central Bank President Mario Draghi, suggesting its losses against the dollar could well continue. The ECB President, in a lecture in Berlin, said he “would certainly prefer not to have to keep interest rates at such low levels for an excessively long time, since the unwelcome side-effects may accumulate over time.” He added: “We should seek to create the conditions for a return of interest rates to higher levels.”

However, there was no indication that rates or the pace of stimulus will be cut soon – in line with his comments last Thursday after the ECB Governing Council decided to leave all its key interest rates unchanged and its asset-purchase program at €80 billion per month. The program is intended to run until the end of March 2017, or beyond if necessary. At last week’s policy meeting, Draghi gave no indication that the program will either be tapered – reduced – or extended beyond March. Instead, he implied that the markets will have to wait until the next gathering (December 8th) for any clarity on intention and that tapering will begin before the ECB cuts Eurozone interest rates.

Against this background, there seems little to stop committed EUR/USD decline. The pair has been in a declining channel on the daily chart since late September. Over that period it has fallen from highs around 1.1250 to its current level around 1.0850, marking one of the most aggressive slides this year. Unless the fundamental winds shift, there is therefore little to prevent EUR/USD from easing further until it reaches the February and March lows around 1.0820 and then the January lows close to 1.0710.

Euro May Have Further to Fall as Draghi Keeps Markets Guessing

Fundamentally, the Eurozone economic outlook remains weak despite news on Tuesday that Germany’s Ifo business climate index improved unexpectedly in October. That suggests there’s little room for tapering the asset-purchase program even though Eurozone inflation is at its highest for level in two years and inflation expectations have further risen.

However, short positions in the Euro continued to rise ahead of the ECB’s October meeting, according to the latest Commitments of Traders report from the US Commodity Futures Trading Commission. As a contrarian indicator, that leaves open the risk of a sharp rise in EUR/USD if it starts to firm and traders are forced to cover their open short positions.

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