EUR sell-off intensifies post-Draghi, GBP slides

Forex News and Events

The BoE and the ECB maintained the status quo at their March meeting. In the UK, it has been six full years that the BoE stays at 0.5% record low interest rate and has no reason to rush to normalization given the disinflationary pressures. While the next BoE move will most probably be a rate hike (although not expected anytime sooner than Q1, 2016), the divergent monetary policies with the dovish ECB, BoJ, BoC and the RBA, but also verse easing EM central banks (led by India, China) should sustain the pound sterling, once May 7th election jitters are over. At the moment, the GBP-traders’ focus increasingly shifts to political talks. The political uncertainties should weigh on the GBP-complex through weeks ahead. GBP/USD eased below the 50-dma (1.5266) while EUR/GBP rebounded from the fresh low of 0.72197 following ECB Draghi’s press conference. There is good chance we hit a bottom, if not solid bids should lend support at 0.70/0.72 band. In the futures market, the 1-3 month futures market price in lower preference in GBP verse EUR and USD.

At his monthly press conference in Nicosia, the ECB President Draghi’s press conference triggered short-term volatility in the FX markets. EUR/USD first spiked to 1.1114 as Draghi said the borrowing conditions improved significantly - thanks to positive impacts of bond buying program - and the benefits from measures are being transmitted to the real economy. While the inflation is expected to remain in negative territories for couple of months ahead, the stimulus significantly “damped second round oil effects” and halted the decline in inflation expectations according to Draghi. The ECB staff predict the Euro-zone inflation back to 0% (vs. 0.7%) in 2015, with the real GDP expected to accelerate to 1.5% (vs. 1.0%). The optimistic tone revived a short-lived rebound in EUR/USD yet levels above 1.11 quickly became good price for fresh shorts.

What didn’t please the EUR-trader?

First, the ECB will start buying 60 billion euro worth sovereign debt per month from Monday March 9th until September 2016… and longer if needed. Concretely, the ECB pledges to extend the QE program until the inflation is comfortably on path to 2% target. The open-ended QE means that the total size of asset purchases may exceed 1.14 trillion euro and this is no positive news for the EUR. Although the inflation expectations suggest there would be no need to extend the sovereign purchases (CPI to pick-up to 0% in 2015, 1.5% in 2016 and 1.8% in 2017!), the uncertainty over the economic forecasts failed to convince traders.

Second and worse, the ECB will buy negative yielding debt. Although the purchases exclude papers yielding lower than the deposit rate, this flexibility will most probably shift demand to longer maturity bonds and distort the duration of bond portfolios.

“ECB is the central bank of Greece”

Finally, the doubts vis-à-vis the Greek bailout crisis keep the EUR markets quite tense. President Draghi said the Greek banks are in good shape and it is important to keep them healthy. The “ECB is the central bank of Greece” said Draghi as the 100 billion euros lent to Greece stands for 68% of country’s GDP. The ECB is ready to consider reinstating the waiver for Greek bonds’ eligibility as collateral, however certain conditions should be met.

Greece needs to repay 6.5 billion euros of debt and interest in three weeks ahead, if not another default will certainly be a massive damage to country’s credit rating and will automatically leave Greece out of the QE program. On Monday, the Finance Minister Varoufakis will meet his EZ counterparts to seek solution to unlock funds. Draghi highlighted that Eurogroup decisions are important to “an enormous extent” to the ECB. “If there is an agreement, our background changes completely and we would be in much better place to take favorable decisions for Greece”, he added.

EUR/USD sell-off intensifies