Top 10 Takeaways from ECB Meeting
EUR/USD traded sharply higher this morning on the back of less pessimism from ECB President Draghi and a better than expected U.S. jobless claims report that sent the S&P 500 to fresh record highs. As expected, the European Central Bank left interest rates unchanged at 0.25%. While Mario Draghi reiterated his pledge to keep rates at present or lower levels for an extended period of time and warned that they could take decisive action including activating OMT if needed, these recurrent threats fell on the deaf ears. Instead, investors latched onto the central bank’s upgraded 2014 GDP forecast, Draghi’s observation that money market conditions normalized further and the news in the past 4 weeks has been largely positive. The central bank saw no reason to halt SMP sterilization, which would have been negative for the euro because there is no sign of stress in money markets. They cut their inflation forecasts for 2014 and said the emerging markets and geopolitical uncertainty puts the risk to the economic outlook to the downside but these comments were not surprising. Traders sold euros going into the ECB rate decision and the lack of overly dovish comments today from Draghi triggered a short squeeze in EUR/USD that drove the currency pair to its highest level this year.
Here are our Top 10 Takeaways for the ECB Rate Decision and their implications for the euro
1. ECB Leaves Rates Unchanged at 0.25% - EUR Neutral
2. Reiterates pledge to keep rates at present or lower level for extended period of time - EUR Neutral
3. Repeats warning that ECB stands ready to take decisive action if needed – EUR Neutral
4. ECB Upgrades 2014 GDP growth to 1.2% from 1.1%, expects 1.8% in 2016 - EUR Positive
5. Risks to economic outlook to downside (including EM and geopolitical uncertainty) – - EUR Negative
6. ECB sees news in past 4 weeks largely on positive side - EUR Positive
7. ECB Cuts 2014 Inflation forecast to 1% from 1.1%, expects CPI at 1.7% in Q4 of 2016 – - EUR Negative
8. Money market conditions normalized further – - EUR Positive
9. Saw no reason to halt SMP Sterilization – - EUR Positive
10. EUR rate not a policy target but important for growth and inflation - EUR Neutral
The move in the EUR/USD today takes the currency pair above a very important long term Fibonacci resistance level at 1.3835/40. At the time that this article is published, EUR/USD is still in the midst of testing this key level. A sustained break above this resistance would open the door for a move up to the 2 year high of 1.3893.