Article / 21 July 2017 at 15:06 GMT

Euro isn't dancing to Mario's tune

FX Trade Strategist /
  • Loonie rallies on strong data
  • EURUSD traders turn deaf ear to Draghi
  • Next week's FOMC meeting may disappoint
ECB president Mario Draghi
 ECB president Mario Draghi tried to be as dovish as possible, but the market 
didn't listen. Image: screengrab from ECB's July 20 webcast

By Michael O'Neill

The Canadian dollar punched through the last decent support (1.2570 to the USD) ahead of 1.2465 following robust inflation and retail sales reports. Today's data supports another rate increase, perhaps as early as September 6, 2017. 

Super Mario who?

If a central banker speaks and no one listens, did he really say anything? 

European Central Bank president Mario Draghi may have solved the philosophical question "If a tree falls in a forest and no one is around to hear it, does it make a sound?"

Draghi on Thursday was doing his best to dampen expectations of an imminent taper of the ECB’s quantitative easing programme. It didn't work.

In his remarks after the ECB governing council kept interest rates and its QE programme unchanged as expected, Draghi underscored inflation concerns, saying “measures of underlying inflation remain overall at subdued levels.” He added “a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.”

And then he threatened, saying “If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.”

EURUSD traders weren’t listening. They were looking for good news and found it when he said “the current positive cyclical momentum increases the chances of a stronger-than-expected economic upswing.”

EURUSD rallied, and many forecasters expect it to reach 1.2000 reasonably quickly. And why not? 

The technical picture is bullish, with a break of 1.1750 (61.8% Fibonacci of Dec. 2014-Jan. 2017 range) leading to 1.2050 ( 76.4% Fibonacci level). That view is further supported by the move in the US dollar index below 94.75, which suggests further losses to 92.00.

EURUSD daily with Fibonacci levels shown
Source: Saxo Bank

The week ahead

The Federal Open Market Committee hogs the spotlight in the coming week.  But the fact that it is a "statement-only" meeting suggests that it won’t match the ECB for creating a stir.

On Monday, FX markets are likely to be subdued as traders await the FOMC's Wednesday statement. The Opec meeting in Russia could create some oil price volatility and commodity currency volatility by default.

On Tuesday, Asia gets to deal with the minutes of the July 20 Bank of Japan meeting. German IFO data is on tap. The US data, including the Case-Shiller home price index, won’t have much of an impact, suggesting another quiet day.

Wednesday, the FX action should pick up. Kiwi traders get to deal with trade data, while the Aussies get an inflation report. UK GDP data is sure to cause a stir with GBPUSD traders, as will the inflation report. New York will be quiet until 1800 GMT. If the FOMC sounds spooked about soft inflation, the US dollar will sink.

Thursday, the FOMC statement will dictate Asian activity. If the statement is benign, traders will look to US durable goods for some excitement.

Friday is a big day for data across the globe. Japan kicks it off with retail sales followed by the Australia producer price index. The UK releases housing price data.  A flood of data is due from the Eurozone, though none of it top-tier. The US data includes GDP, and consumer sentiment. Canada GDP is also on tap.

The week ahead

The European Central Bank meeting was expected to produce the excitement this week. It did.

On Monday, better-than-expected China data, including second-quarter GDP and retail sales, gave early support to the antipodean currencies. But the moves were underwhelming, partly due to the Marine Day holiday in Japan. European traders ignored a tiny drop in HICP inflation to 1.3%, preferring to await news from Draghi and the ECB on Thursday.

The New York session was the quintessential “summer market.” The usually ignored New York Empire State manufacturing index caused a minor ripple in the morning. The day finished with the greenback posting tiny gains against the majors, except for the euro and Swiss franc. Oil prices slid steadily from the open, and Netflix (NFLX: Nasdaq) rallied 17.0% in after-hours trading after announcing 5.7 million new subscribers.

On Tuesday, the US dollar was beaten in Europe and Asia after the Republican Party’s second attempt to repeal Obamacare failed. The second failure of a key Trump platform elevated risks that his tax-cut strategy would suffer the same fate. That was on top of persistent concerns that the pace of US tax increases would slow.

 AUDUSD had a brief rally when the Reserve Bank of Australia minutes were deemed to be hawkish. AUDUSD rose to 0.7987 from 0.7950. The move didn’t last, however, and the currency pair closed in New York at 0.7907. Weaker-than-expected German ZEW data did not have much impact, but below-forecast UK inflation did. GBPUSD dropped to 1.3006 from 1.3120 before inching higher at the New York close. The US session saw a bit of chop among the majors, but FX markets closed virtually unchanged on the day.

Wednesday was mostly a write-off. FX traders sought direction while they biding their time ahead of Thursday’s ECB meeting. They found it in the oil market. Oil prices rallied when the weekly US Energy Information Administration data showed inventory declines in crude and gasoline. That move contributed to commodity currency bloc gains.

Thursday’s action more than made up for Wednesday's lack of activity.  Better-than-expected Australian employment figures lifted AUDUSD to 0.7987. But that was it. AUDUSD retreated to 0.7908 just before the ECB announcement. The Bank of Japan left policy unchanged, but pushed back the timing for when it would achieve its inflation target. USDJPY climbed steadily, rising to 112.41 from 111.78, ahead of the ECB meeting. EURUSD drifted in a narrow range, while sterling came under pressure despite healthy UK retail sales. That was before the ECB statement and Draghi’s news conference.

The ECB left rates unchanged, as expected, and Draghi was dovish, as expected. The surprise was a sharp EURUSD rally that started when trader chose to ignore Draghi’s warnings and focused on his rather rosy economic outlook. The day ended with US dollar losses across the board. The euro was the best-performing currency, followed closely by the New Zealand dollar.

On Friday, AUDUSD got thrashed in Asia after a speech by the RBA deputy governor tossing cold water on rate hike speculation. The USD opened in New York a bit softer than Thursday’s close, except against the Australian dollar. Canada inflation and retail sales drove USDCAD lower.

US dollar with Fed emblem
 And the spotlight swings back to the Fed. Image: Shutterstock

— Edited by John Acher

Michael O'Neill is an FX consultant and currency strategist at


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