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EUR/USD falls below 1.2500 on Draghi's comments on Thursday - BTMU

FXStreet (Łódź) - Derek Halpenny, European Head of Currency Strategy at the Bank of Tokyo Mitsubishi UFJ remarks that following Mario Draghi's comments on the balance sheet size and hints on further easing EUR/USD dropped below the 1.2500 level.

Key Quotes

"The power of communication. For so long earlier this year, the ECB’s communication wasn’t having much impact but once action is taken by a central bank to back up its words, then communication can turn into a very powerful tool. And so it was yesterday with ECB President Draghi’s explicit comment on balance sheet size and clear hints on further easing pushing the EUR/USD rate well below the 1.2500 level that had been holding for a time."

"The explicit mention of the balance sheet going back to “2012 dimensions” also served the purpose of undermining the speculation fuelled by a market report that there were divisions within the ECB Council over President Draghi’s communication style, like communicating a balance sheet target when it was agreed not to. Not only did Draghi mention “2012 dimensions”, he made clear that referred to the time after the second LTRO when the balance sheet hit its EUR 3trn peak.0"

"In terms of what has changed, Draghi also intimated that the ECB staff forecasts next month will be lowered again – the current inflation forecasts for 2015 and 2016 are 1.1% and 1.4% respectively. The European Commission this week put inflation in those years at just 0.8% and 1.5%."

"So we are quite likely to see a notable change to the 2015 level although it is debatable whether the 2016 level will be changed. Apart from the fall in crude oil prices, there has not really been any dramatic change in economic conditions."

"Indeed, Italy and France have backed away from fiscal austerity, helping the growth outlook. Nonetheless, the change in inflation outlook appears the key factor for allowing Draghi to hint at further action by stating that the ECB Council has been “tasked with preparing further measures if needed”."

"Finally, from an FX perspective, our current EUR/USD forecasts were based on the assumption of no full-blown sovereign debt QE (1.1800 Q3 2015). That assumption is looking questionable at the moment and hence our forecasts may require downward revisions."

"Draghi did emphasise the widening monetary divergence ahead and with asset purchases set to continue for two years, EUR/USD will continue to fall. We are still not convinced of sovereign debt QE being unleashed in December and hence for now we will maintain our 1.2500 end-2014 target."

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