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Draghi’s QE comments cause shockwaves

Draghi’s QE comments cause shockwaves

The Euro moved into a two-month low against the Dollar and a one month low versus the Pound yesterday after the European Central Bank (ECB) hinted at more stimulus in December, tipping the common currency into one of its biggest falls in recent years.

Against Sterling, the Euro dropped 2% since market open and broke below levels which have been a major support for the currency in the past few weeks. ECB President Mario Draghi said on Thursday that the bank was studying new stimulus measures that could be unveiled as soon as December and was prepared to cut its deposit rate deeper into negative territory. Futures markets now have priced in an over 50% chance that the ECB will cut rates in December, but the tone of the market suggests that even more is going to be priced in as we head towards the next meeting.

While Sterling gained against Euro, it remained relatively flat, around 1.5400, against the Dollar yesterday. GBP/USD remains directionless at the moment while Draghi’s comments are being digested by the market. UK Retail Sales figures came in surprisingly positive yesterday however, increasing to 1.9% month-on-month from a previously disappointing -0.4%. Results like that, coupled with continued real wage growth and strong employment outlook, suggest it may be sooner rather than later that Ian McCafferty will be joined by a couple more Monetary Policy Committee members siding with a rate hike at the next Bank of England meeting.

All in all, the performance of the Dollar was largely dictated by Mario Draghi. As traders adjusted positions post press conference, the Greenback was the main beneficiary as flows poured from the Euro.

From a fundamental standpoint, data from the US was, for the most part, positive. Jobs data showed that new jobless claims came in under analysts best forecasts by 6 000, whilst existing jobless claims also beat the consensus. To accompany the positive Dollar tone, home sales figures also showed quite a substantial period of growth through the previous months.

Looking at the broader picture, the question that market participants want answering is “when are the FED going to raise the interest rate?”. It’s made many of us sound like broken records as uncertainty shrouds what was once something of an exciting talking point. After the conclusion of last month’s meeting of the FED, the committee expressed great concern surrounding the growth and inflation pressures in the US. Whilst Stateside financial conditions have eased somewhat, they have arguably done so for the wrong reasons. Without clarity on China, commodity markets or emerging market currencies, participants have anticipated a later and slower tightening.

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