Foreign Exchange News
7 February 2014

Draghi’s Verbal Masterclass Continues But Germany Questions OMT

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EUR/USD 1.3567
GBP/USD 1.6323
GBP/EUR 1.2022 (0.8316)
EUR/CHF 1.2233
GBP/CHF 1.4708
GBP/AUD 1.8245

Throughout his tenure as ECB President, Mario Draghi has had the ability the make the Eurozone sound infallible, and yesterday’s meeting was no different. Despite glaring issues facing the region Draghi’s reiteration that things are improving was enough to lift market spirits and the EUR. Global equities saw green following better than expected earning results and a decline in jobless claims in the US. This positivity carried through into the Asian session overnight as the Reserve bank of Australia raised their growth forecasts topping off a positive week for the Aussie.

The big event of the day was the ECB announcement and perhaps catching the market somewhat off guard when the ECB chose to maintain their current policy. With disinflationary pressure rising in the region and all out deflation in some nations, markets had expected the ECB to act. However despite showing some concern for deflationary risks, Draghi and the ECB feel the market needs more time for recent rate cuts to feed back through the economy. It looks like March will be a decision time, should inflation remain weak then we may see the ECB called to action. As it stands the ECB remain ready to act, and willing to use all the tools at their disposal.

This brings us to this morning’s news that the German constitutional court has asked the European court for advice on the OMT. The German court says they see substantial reasons to suggest the OMT program exceeds the ECB’s mandate and infringes on a ban on funding member states. Germany will look to rule on the ESM bailout mechanism and fiscal pact on March 18th. This news this morning saw EURUSD down 35 pips, the drop could be far more severe if Germany succeeds in removing Draghi’s tools.

The BOE as expected offered very few surprises and therefore saw no reason to update markets on their policy outlook. All everyone wants to know is will the BOE change their forward guidance outlook as unemployment drops ever closer to its 7% guide. Next week we have the BOE’s inflation report which will give the central bank the opportunity to address what the market is looking for. In our view this should be dovish, as we’d expect any change to push interest rate hikes back out into the later end of 2015. Watch this space.

The USD faced selling pressures yesterday post ECB, global risk sentiment was improved and EM asset markets continued to show gains and as such the USD lost some of its haven appeal. The markets attention however will now be firmly fixed on today’s Non Farm Payrolls. With US stimulus so closely linked to employment conditions the NFP release carries with it massive volatility risks for FX markets. Last month’s dismal reading put the USD on the back foot with anticipation that a weak report would cause the Fed to stop their taper efforts. This did not happen and it appears the Fed are likely to maintain their path to wind down the QE program.

We only see this path changing should we see multiple NFP’s in the sub 100 region. Today’s reading is expected to show a pickup in Jobs growth from December, with 180k jobs added through January. Many are anticipating a lower reading due to weather implications so in our view anything on par with estimates will be positive for USD and we should see a small rally for the greenback.

Elsewhere this morning we have UK data on tap with industrial and manufacturing production due, as well as trade balance figures. The pace of growth is expected to slow in industry and manufacturing with a narrowing of the trade deficit also.

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