Draghi Dampens Euro, But Rally Remains Intact

Draghi Comments Weigh on EUR

EUR has come under pressure over the last 24 hours due to comments made by ECB chief Mario Draghi. Testifying at the European Parliament in Brussels yesterday, the ECB chief declared that the Eurozone economy still requires a “fairly substantial amount” of monetary stimulus from the central bank. As these comments will be the last public comments from the ECB chief ahead of the forthcoming ECB meeting, traders are taking them as a sign of what is to come when the central bank meet for the monetary policy review.

Institutions Now Net-Long EUR. First Time Since 2014

Persistent upside data surprises over recent months have been stoking market expectations of a shift in course for ECB monetary policy.

The changing views of market participants regarding the trajectory of the Euro are clearly visible in the CFTC’s COT positioning report which shows that institutional players recently turned net-long the Euro for the first time since 2014. This marks a distinct reversal in sentiment from the record short levels seen in early 2015.

Monetary Policy Support Needed To Continue The Recovery

Draghi continued his commentary by saying that “Overall, we remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary for the present level of under-utilised resources to be re-absorbed and for inflation to return to and durably stabilise around levels close to 2pc within a meaningful medium-term horizon.”

The ECB have traditionally used “verbal intervention” as a way of capping EUR upside, and so for many traders, the timing of these comments come as no surprise, and already we have seen some EUR long positions being squared ahead of the June ECB meeting.

Eurozone Recovery Still Fragile

Draghi did acknowledge that there has been better economic performance though again registered his concern for underlying inflation saying that “Despite a firmer recovery, and looking through the volatile readings in HICP inflation over recent months, underlying inflation pressures have remained subdued. Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective.” The next Eurozone Inflation reading will be released tomorrow with headline inflation expected to fall back to 1.5% from 1.9% and core inflation expected to fall to 1% from 1.2%.