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Euro shrugs off Draghi’s dovish narrative

Despite all the central bank focus yesterday European and US equity markets finished the day on a rather mixed note.

While the FTSE 100 closed strongly higher, due to the weak pound, European markets slipped back after the euro pushed up to its highest levels in two years against the greenback. 

The strength of the euro does appear to be acting as a bit of a headwind for European stocks as they look to close the week sharply lower, in contrast to the performance of UK and US stocks this week.

US markets also underwent a choppy session, once again posting new record peaks, just before it was reported that special counsel Robert Mueller was said to be looking into the business dealings of President Trump as well as his associates, including his son-in-law Jared Kushner.

This saw US stocks slip back and close slightly lower, though the Nasdaq did manage to eke out a gain for the tenth day in succession, with more tech earnings set to get under way next week in the shape of Alphabet (Google).

I think we can be pretty sure that when European Central Bank president Mario Draghi sat down for his press conference yesterday, the last thing he expected to see was the euro hit its highest level in over two years, and for equity markets to slide back. After all the economic recovery, while strong so far this year, still has its weak spots, and for the most part the ECB statement and press conference was almost a “cut and paste” from the June meeting.

There was nothing in the overall narrative that came across as remotely hawkish, with the ECB president expressing concern about the prospects of a tightening of financial conditions, and he went on to include references to weak core prices, and a commitment for QE to run until there is evidence of an inflation pick-up. He also stated that scenarios around tapering weren’t discussed, as he appeared to bend over backwards to suggest that the ECB was quite some way off even considering backing off the pace from their current stimulus plan.

Sadly for him the currency markets weren’t buying it and the euro, after initially dipping, roared back in the afternoon session, though it was probably helped by events in the US and a possible investigation into the president’s business dealings, which saw the US dollar slip back further.

This rather presents the ECB with a problem in meeting its inflation target and it’s hard to see what they can do about it, given the weakness of the US dollar, and they aren’t likely to get any help from the Federal Reserve next week, given their similar concerns about the inflation outlook in the US, which suggests that it probably won’t be long before we see a move to 1.2000 in short order, and levels last seen at the end of 2014.

The pound has had a disappointing week despite economic data that on the face of it has been fairly good, however the weaker-than-expected inflation numbers has taken some of the pressure off the Bank of England in terms of the prospect of a potential tightening of policy, while the slow progress on this week’s initial Brexit talks probably isn’t helping.

Forex snapshot

EUR/USD – the support at the 1.1480 area held yesterday and we subsequently took out the 2016 highs at 1.1617, pushing up to 1.1658 with the potential to head towards the 200 week MA at 1.1800. Only a break below the 1.1480 area opens up a pullback towards the 1.1300 area.

GBP/USD – slid back below the 1.3000 level triggering stops down to the 1.2930 area, but while above 1.2900 the momentum remains positive. A move below 1.2900 opens up the 1.2700 area. We need to get back above the 1.3020 area to regain the positive momentum.

EUR/GBP – having held 0.8820 yesterday the euro took out the 0.8900 level, negating the bearish outlook and shifting the focus back to a retest of the 0.9000 level and last year’s high at 0.9300. Support now comes in at the 0.8870/80 area.

USD/JPY – we saw another test of the 111.50/60 area yesterday and for now it seems to be holding but a break below here argues for a move towards the 110.20 area. We need to recover back through the 112.30 area to look at a retest of the 113.20 area. Below 111.60 opens up the 110.20 area.


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