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EUR/USD Rallies to Highest Since Jan 2015 as Draghi Mum on Policy

EUR/USD Rallies to Highest Since Jan 2015 as Draghi Mum on Policy

Daniel Dubrovsky, Contributing Senior Strategist


Talking Points:

  • Euro appreciated as ECB’s President Mario Draghi spoke at Jackson Hole, Wyoming
  • Draghi failed to mention a word on monetary policy, disappointing dovish expectations
  • The ECB’s President then rose concerns about inflation, pushing back some Euro gains

See how the trading community is positioned in the Euro on the DailyFX Sentiment Page.

The Euro posted a late-in-the-week rally following ECB’s President Mario Draghi’s remarks in Jackson Hole, Wyoming. During the Fed’s economic symposium, the central bank president weighed in on subjects such as protectionism, the global recovery since the Great Financial Crisis and lax regulations. Notably absent though was any reference to their current loose monetary policy efforts and when they may begin to normalize.

According to Senior Currency Strategist Christopher Vecchio, high expectations that the European Central Bank will taper its monetary stimulus (also known as QE) perhaps as early as September made this week a litmus test for the Euro. That in turn positioned the Jackson Hole speech as top tier economic event risk for a currency that has advanced throughout 2017.

What was absent from his speech seemed to be what helped push EUR/USD to its highest level since January 2015. Generic Eurozone 2-year government bond yields have been falling this week signaling a recent buildup of some dovish ECB monetary policy expectations. Perhaps Draghi failing to broach the subject disappointed those bets more than drive the nascent hawkish reversal views.

However, the Euro’s strength did not last forever. Forty minutes after his main remarks, Draghi took questions during a Q&A session. During the open forum, the central bank head mentioned that the ECB is not yet there on inflation and they therefore must remain on guard. He also added that a significant degree of accommodation is still warranted. With liquidity draining into the weekend, the market took that familiar language as its cue to top gains and turn the focus to next week.

Initial Mario Draghi Comments:

  • Openness to trade is under threat
  • Policies must aim at answering backlash
  • Global recovery is firming up
  • Europe recovery consolidation at earlier stage versus the US
  • Return toward protectionism would be a serious risk
  • Lax regulation can stoke imbalances when monetary policy loose

Q&A Session Draghi Comments:

  • Euro-area inflation convergence not yet self-sustained
  • Significant degree of accommodation still warranted
  • Euro-area recovery is gaining ground
  • Quantitative easing has worked very well
  • ECB isn’t there yet on inflation, must remain on guard

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