EURO SURGES AFTER DRAGHI’S REMARKS
The euro surged on Tuesday after European Central Bank (ECB) President Mario Draghi acknowledged a broad pickup in economic strength throughout the region.
Speaking at the ECB’s Forum in Portugal, Draghi made it clear that monetary policy would need to remain in place as inflation remains “more muted than one would expect.”
At the same time, the euro area economy is finally gaining traction.
“All the signs now point to a strengthening and broadening recovery in the euro area,” Draghi said.
“We can be confident that our policy is working and its full effects on inflation will gradually materialize. But for that, our policy needs to be persistent, and we need to be prudent in how we adjust its parameters to improving economic conditions,” he added.
The ECB has been under growing pressure to unwind monetary policy in light of recent inflation and GDP numbers. Expectations of a rollback in stimulus have sent the euro higher in recent weeks.
Draghi’s bullish remarks triggered a sharp rise for the EUR/USD, which reached a session high of 1.1280. That’s a gain of 100 pips.
The pound also strengthened as the dollar plunged against a basket of world currencies. The pound-dollar exchange rate reached a session high of 1.277 on Tuesday.
The dollar index (DXY) was down 0.6% at 96.86, its lowest in over three weeks.
Federal Reserve Chairwoman Janet Yellen is scheduled to deliver a speech later in the day. Unlike other central banks, the Fed has been actively tightening monetary policy, but this has had a minimal effect on the dollar amid signs of a slowing domestic economy.
A weaker dollar helped precious metals stabilize after a sharp selloff at the start of the week. Gold prices recovered from weekly lows, although upside was limited at the start of New York trading.
The bulls are back in control of the EUR/USD, as the common currency continues to benefit from monetary policy speculation. The pair is looking to establish new yearly highs north of 1.1285, with a re-test of 1.13 appearing more and more likely.
The cable’s upward momentum continued on Tuesday, as the dollar declined sharply across the board. The GBP/USD faces immediate resistance at the psychological 1.28 level. However, the pair remains exposed to further losses now that volatile Brexit negotiations have begun. Traders should, therefore, tread cautiously in the short term.
Gold prices stabilised after a sharp decline on Monday, as precious metals took advantage of broad dollar weakness. Bullion’s sharp reversal at the start of the week put it below a key technical threshold, a sign of weak underlying momentum in the asset. The bearish picture is unlikely to change without a fundamental shift in the market.