15 June 2018

Euro drops close to 300 pips after Draghi's speech - is this a buying opportunity?

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  • Mario Draghi disappointed the Euro bulls yesterday forcing the Single currency to collapse close to 300 pips lower when he delivered his forward guidance after the ECB interest rate decision. The head of the ECB announced that the central bank plans to end their QE program by December 2018 - when the markets were expecting something maybe sooner - and also to keep interest rates unchanged until the end of the summer of 2019.
  • This extension in the horizon of expected tightening from the ECB disappointed investors that were hoping that the positive growth in the Euro area would allow Draghi to sound a bit more bullish. Nevertheless, with the Euro now trading just above the 1.1550 area and with Europe indeed on a path of progress, is this a buying opportunity? In order to make an educated decision on this we also have to take a look at the other part of the equation: the US Dollar.
  • The US currency gained considerably yesterday when Draghi sent his less bullish than expected message. The Dollar Index is now trading at the 95.00 mark receiving inflows from most of the higher beta currencies. With the Fed signaling that they plan to raise rates two more times this year, investors are jumping on board the hype train. But we have to remember that Trump has a key goal that threatens Dollar's outlook: to reduce his trade deficit with China and this demands a weaker domestic currency.
  • As such, there's a strong argument for the Euro/Dollar to start picking up pace from its current levels over the medium term. Now that investors know that the Fed will raise rates 2 more times in 2018 and as soon as this becomes priced in, then Dollar bulls will struggle to find more positive catalysts to further fuel the Dollar higher. On the other hand, longer term players will want to position in favor of a stronger Euro in the months to come so we're of the view that the current levels for the Euro present an interesting opportunity to go long.
  • Equity markets are trading mixed this morning in Asia and the European and US futures are trending towards a muted London opening. ECB's decision to delay tapering provided fresh stimulus to the European bourses but it is more likely that investors will focus on President Trump's intention to impose fresh tariffs on China. As such, we're expecting a defensive session today and if indeed Trump goes ahead and announces more levies on the Asian nation then the major markets will end the week on a bearish note.

MARKET EVENTS TO WATCH

  • Euro-Zone Consumer Price Index - 1pm

  • Univer. of Mich. Sentiment - 6pm

All times are GMT +4.

 
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