The European Central Bank’s monetary policy decision may have been the most important event risk on the calendar today but it was the confidence vote in Italy that sent the euro above 1.36. The single currency rose to its strongest level in 7 months after Premier Enrico Letta won the no confidence vote and despite cautious comments from ECB President Draghi, the euro managed to hold onto its gains. Italy’s political crisis has been threatening the stability of the region for the past few months and Letta’s victory means that it is finally coming to an end, removing a major risk for the EUR/USD. The euro also avoided a sell-off when ECB President Draghi failed to directly mention LTRO.
Earlier this morning, Berlusconi gave up his attempt to bring down the government by saying he would vote for Letta. Over the weekend, Berlusconi received widespread criticism for asking five ministers from his People of Freedom Party to. With an expulsion vote scheduled for Friday, these resignations were his last ditch effort at trying to affect the outcome. However senior officials in his own party rejected Berlusconi’s brash efforts and threw their support behind Letta. This was the first time in 2 decades that Berlusconi’s party has turned on him and Letta’s victory now removes a major risk for the euro.
On the other hand, there’s no question that the ECB is dovish but at this stage, they are in no rush to increase stimulus. During his press conference, Draghi acknowledged that confidence and survey indicators have been improving but he also felt that the risks are to the downside. Like other central bank heads, he expressed specific concerns about the U.S. budget shutdown and the impact that it could have on the U.S. and global economy if it lasts for more than a few days. While he said the region is more resilient now than before, he called the recovery weak, fragile and uneven. As a result, the central bank feels that monetary policy should remain accommodative at the present or lower levels for an extended period of time. They are ready to consider all instruments including a rate cut which was discussed today if the economy were to weaken further. None of these comments were particularly new which is why the euro shrugged off Draghi’s dovish bias.
Meanwhile private sector payrolls grew less than expected in the month of September. Economists had been looking for ADP employment change to rise from 176k to 180k but instead U.S. companies added only 166k jobs to their payrolls, up from a downwardly revised 159k. Based on these numbers alone, the Federal Reserve was right to defer tapering but we will have to wait for the non-farm payrolls report to confirm that job growth slowed in the month of September because ADP can over or undershoot NFPs. If the U.S. government remains shutdown on Friday, the labor market report will be delayed until the shutdown ends.