Dovish Draghi Fooling No One
|ECB President Mario Draghi did everything he could today to put a dovish slant on a central bank that's actively pursuing less monetary stimulus but as we've seen before, traders were not interested in what he had to say, it's what he didn't say that was important.
The euro was already rallying in the lead up to the ECBs monetary policy announcement and Draghi's press conference, displaying a confidence in how both would play out. Once again today, the ECB was keen to stress that QE could be increased in both size and duration should the economic outlook warrant it, rather than stating what is likely to happen under the current circumstances.
It's clear, as Draghi repeatedly mentioned, that policy makers are concerned about the strong and rapid appreciation that the currency has experienced, which is probably preventing them from making a tapering announcement at this time. The problem they face is, in not talking about tapering or, more importantly, suggesting that the program could be extended as it is beyond the end of the year, they are effectively confirming that tapering will happen. Or at least, that's how traders are perceiving it.
What's interesting is that, once the volatility passed – and we saw extreme volatility in the opening minutes of Draghi's press conference – the euro rallied as high as 1.2059 against the dollar, just shy of the 29 August high, before profit taking set in. The failure to make a new high is a sign of an overheated market. At the same time, the pair has since fallen back to trade below 1.20 which could be another sign that the rally has run its course for now.
Another failure to end the day above 1.20, despite having traded significantly above there on two occasions, would strongly suggest the psychological resistance is in play. Draghi may have failed to convince traders that the ECB is in fact dovish but he may have stumbled upon a natural barrier to the upside in the process, at least for now.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.