Draghi show: EUR/USD edges towards 1.40 before crashing

After the ECB left rates unchanged again and sent the euro higher, the president of the European Central Bank Mario Draghi met the press and provided much needed forex fireworks. He did not offer anything new in the prepared statement, thus pushing the the euro higher. By saying that risks to inflation are low, EUR/USD edged towards 1.40. While he said that the stronger euro is a cause for serious concern, he did not offer action. And then it all changed: a heavy hint to act next month sent the euro tumbling down. 

Here is a live blog of the event that always rocks the euro and was very special this time.

Highlights

• Limited downside and upside risks to inflation
• EUR/USD rises
• Repeats pledge for low rates and unanimous will to use non conventional tools
• Mentions geopolitical risks and exchange rate, like in April
• Stronger euro is a cause for serious concern on the background of low inflation.
• And then came the bomb: Governing council ready to act next month, data dependent. EUR/USD crashes.

Live Blog

• 12:15 GMT. Press conference begins at 12:30. All times are GMT.
• 12:15 You can watch the press conference here.
• 12:15 At the same time, the US releases weekly jobless claims. They are expected to drop from 344K to 328K.
• 12:15 The cycle high of 1.3966 is very close. 1.40 is the clear resistance line, followed by 1.4115. Support is at 1.3894. For more levels, see the EUR/USD forecast.
• 12:17 Following the “no change” announcement, the euro went higher but did not break the cycle high.
• 12:21 Draghi has talked down the euro several times, but his success rate is diminishing.
• 12:23 In order to have success, he will probably have to lay down a heavy hint about a move in June unless we have an improvement. The ECB published updated forecasts every 3 months. The next one is in June.
• 12:25 The “Easter effect” indeed happened: inflation picked up between March and April, but it still remains low.
• 12:27 A move of EUR/USD above 1.40 cannot be ruled out if Draghi’s language is not convincing. Note that this level is closely watched, meaning that a move could result in a false break at first.
• 12:29 Mario Draghi is in the house.
• 12:30 The economic recovery continues as expected.
• 12:30 Draghi sees only gradual rise in inflation.
• 12:31 Will watch markets very closely.
• 12:32 Draghi repeats pledge to use non conventional tools to combat lowflation.
• 12:33 More forecasts will be published in June.
• 12:34 Nothing new – EUR/USD breaks and peaks so far at 1.3987
• 12:3 Draghi mentions geo-political risks, like last time. Other downside risks are low domestic demand and not enough reforms and weak export growth.
• 12:34 HICP went up, mentions Draghi, citing the Easter effect.
• 12:35 Limited upside and downside risks to inflation. This is a key phrase
• 12:38 EUR/USD touches 1.3990.
• 12:39 Strengthening of resilience of banks is needed.
• 12:40 Prolonged period of lowflation expected.
• 12:41 Subdued underlying price pressure in the EZ
• 12:42 Debt to GDP ratios should stabilize. Countries should not undermine progress. Reforms are needed for more growth, improve adjustment capacity and reduce unemployment.
• 12:43 Questions begin
• 12:43 Question about unconventional tools: what is a long period of low inflation?
• 12:44 The answer refers to inflation expectations and the danger of de-anchoring.
• 12:45 Draghi is cynical to criticism.
• 12:46 A question about the exchange rate:
• 12:47 A: We had a discussion on the exchange rate” which is important for price stability and growth. Stronger euro is a cause for serious concern.
• 12:48 The recovery is proceeding at a slow pace. There are downward risks.
• 12:49 EUR/USD weakens to 1.3970 after Draghi does express concern on euro strength.
• 12:50 Lower energy and food prices responsible for 80% of lower inflation.
• 12:51 The exchange rate is also responsible, together with the weak economy.
• 12:52 There is a lag between credit flow and the economies.
• 12:53 “We discussed the exchange rate”.
• 12:54 Governing council ready to act next month, data dependent. EUR/USD crashes to 1.3930.
• 12:55 EUR/USD dips below 1.39
• 12:59 There was not a decision today, but we are getting ready to act.
• 13:00 We are not resigned to accept low inflation for too long.
• 13:01 The ECB seems determined to act.
• 13:02 The concern will have to be addressed (exchange rate).
• 13:04 EUR/USD remains around 1.39.
• 13:06 It’s hard not to suspect that this heavy hint is part of a tactic to talk down the euro and that the threat to act is just a small version of the OMT: presenting a big bazooka that makes real action unnecessary.
• 13:08 The euro strength is a “serious concern for price stability” 
• 13:07 We cannot rest on the memories of past achievements.
• 13:08 Inflation is depressed.
• 13:09 Draghi acknowledges the contribution of external flows to the strength of the euro.
• 13:10 Question about money in Cyprus. No real answer from Draghi.
• 13:12 EUR/USD dips below support at 1.3894.
• 13:13 Looking back at history of deficits, Draghi names the zone’s biggest countries: Germany, France and Italy.
• 13:15 Is this the end of the era when we never pre-commit? It ended a long time ago.
• 13:16 Italy has commitments.
• 13:17 Was there a discussion about a bridge decision before June?
• 13:18 All instruments have been discussed.
• 13:19 The geo-political crisis is a foreign policy crisis, not out area.
• 13:21 EUR/USD dips below 1.3880.
• 13:22 Future lies with more integration.
• 13:23 Press conference ends. 

Looking only at EUR/USD price, we got a test of resistance that resulted in a rejection and strong move to the other direction.

Background

From the ECB preview: Inflation at 0.7% is still far from the ECB target of 2% or a bit below. The exchange rate makes exports less attractive and imports cheaper, crating a danger of deflation. Draghi would like to see stronger inflation and a lower euro, but without having to act. This worked well with the OMT but markets are now dismissing Draghi’s words as they are not followed by action.

Tomorrow we also have an important event for the pair. See how to trade the US JOLTS with EUR/USD.

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