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Euro Under Pressure as ECB's Draghi says More is Needed

Euro Under Pressure as ECB's Draghi says More is Needed

Nick Cawley, Strategist

Talking Points

  • EUR/USD hits a near 1-year low on ECB commentary
  • US Dollar continues to soar
  • Italian constitutional referendum the next potential Euro roadblock

European Central Bank President Mario Draghi knocked the common currency lower early Friday after he told a conference in Frankfurt that Europe’s ultra-loose monetary accommodation will continue. President Draghi said that “a sustained adjustment” in the path of inflation still relies on the continuation of the current, unprecedented financing conditions.

“It is for this reason that we remain committed to preserving the very substantial degree of monetary accommodation, which is necessary to secure a sustained convergence of inflation towards level below, but close to, 2% over the medium-term.”

President Draghi’s latest speech underscores expectations that the ECB will extend its EUR80 billion a month quantitative easing program when the central bank meets in December. Analysts now expect the ECB to extend the bond buying program for another six months after its original March 2017 end date.

And it is not just ECB commentary that is weighing on EUR/USD as the President-elect Trump inspired dollar rally continues apace. The US Dollar index (DXY) is currently trading at a near 14-year high on expectations that Trump will announce a large fiscal package early next year, boosting inflation and sending bond yields even higher.

Euro Under Pressure as ECB's Draghi says More is Needed

And looking ahead, the path of least resistance for the Euro remains firmly to the downside as the Italian constitutional referendum edges closer. Italy will go to the polls on December 4 to vote on a new constitutional reform package aimed at making it easier for the government to pass legislation. However, PM Matteo Renzi has said that he will resign if the reforms are not passed, and the polls are currently evenly balanced on the outcome. If a general election is called, the anti-EU Five Star Movement party is riding high in the polls, fueling concerns of an ‘Italexit’ referendum next year.

These concerns are already being seen in the Italian government bond market with 10-year benchmark yields hitting their highest level since July 2015. The current yield of 2.11% is also double the all-time low of 1.05% made in early August this year.

EUR/USD currently trades around 1.0605 after having touched a near one-year low of 1.0580 earlier in the European session.

Euro Under Pressure as ECB's Draghi says More is Needed

--- Written by Nick Cawley, DailyFX Research

To contact Nick, email him at Nicholas.cawley@ig.com

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

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