Euro Starts to Slide as ECB Finally Jawbones

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Market Drivers for April 14 2014

Draghi, Noyer all express concern over exchange rate, deflation euro gaps lower

Ukraine standoff remains tense

Nikkei -.36% Europe -.52%

Oil $104/bbl

Gold $1326/oz.

Europe and Asia:

GBP RICS 2.6% vs. 1.6%

EUR IP 0.2% as eyed

North America:

USD Core Retail Sales 8:30 AM

USD Business Inventories 10:00 AM

The EUR/USD gapped lower in Asian trade and remained near session lows during mid-morning European dealing as dovish comments by ECB President Mario Draghi and a slew of other council members drove the unit down at the start of weeks trade.

Over the weekend Mr. Draghi stated that ECB would ease monetary policy if the exchange rate kept strengthening and his sentiments were echoed Coeure and Noyer. “The strengthening of the exchange rate requires further monetary stimulus,” European Central Mr. Draghi told reporters in Washington on April 12. “That’s an important dimension for our price stability.”

The ECB officials are clearly becoming concerned that rise in the euro exchange rate can have doubly negative impact on the EZ economy first by exacerbating the disinflationary trends in the region and secondly by dampening demand for exports which are crucial to growth. It appears that the 1.4000 level has now become the Maginot line for European monetary authorities and this week-ends sudden elevation in rhetoric suggests that ECB policymakers want to keep the euro from rising above that figure.

Still it remains to be seen if rhetoric alone will be enough to cap the EUR/USD rise. The market has been almost willfully disdainful of ECB commentary as traders continue to believe that the central bank will not take any meaningful policy steps towards accommodation. Although Mr. Draghi has made many references towards QE, there is massive institutional resistance from Germany towards employing unconventional monetary tools to stimulate the EZ economy and Mr. Draghi remains hampered by both the ECB charter and the more hawkish members on the ECB council.

Furthermore, part of the euro strength has been a function of dollar weakness,as the currency markets appear to be disappointed with the pace of the US recovery. .Recent comments from several Fed members indicate that the FOMC remains uncertain as to when it will move to a more restrictive monetary bias as some of the board members remain unconvinced that the US recovery has gathered enough momentum.

That’s why today US Retail Sales looms large on the horizon as it provide the first unfiltered look at US consumer demand in the aftermath of the very challenging winter season. The market is looking for a jump in the core Retail sales number to 0.5% from 0.3% the month prior. If the data meets or beats the forecast it will go a long way towards allaying concerns about the recovery of the US consumer and may provide spark necessary to push the EUR/USD below the 1.3800 mark and send USD/JY back above 102.00

Boris Schlossberg
Managing Director

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