ECB responds to the current fragility of the Eurozone economy

EUR/USD

Despite a slew of Eurozone PMI figures in the first half of the week, all eyes were firmly placed on this week’s ECB policy decision as EUR/USD traded in a relatively tight range between 1.3100-1.3150. Ahead of the release, source comments reported that the governing council were discussing ABS/covered bond purchase plan at the meeting, with the programme said to be worth up to EUR 500bln and run over 3 years. The greatest source of price action for the pair this week stemmed from the surprise decision by the ECB to cut all three of their key interest rates by 10bps in response to the current fragility of the Eurozone economy. This decision saw the pair crash through the 1.3100 and 1.3000 level to the downside with the decision only forecasted by a minority of analysts. In terms of the ECB press conference, Draghi announced a bond buying programme for ABS and covered bond securities, although due to the earlier source comments, this announcement saw a relatively muted reaction for EUR/USD. Looking ahead, attention next week turns towards the plethora of ECB members due on the speaker slate with Draghi, Lautenschlaeger, Coeure, Mersch and Praet all due to comment. These comments will be of the upmost importance moving ahead as participants will attempt to assess the future path of ECB policy.

GBP/USD

The pair started the week on the back-foot following the weak manufacturing PMI number from the UK and concerns over the growing momentum for the ‘Yes’ vote in the Scottish referendum. In terms of other data points from the UK, the services PMI figure came in at a 10-month high, although the main focus for the week centred around the BoE rate decision. Despite some outside speculation of a potential rate, hike, the MPC acted exactly in line with market expectations by keeping rates on hold. The pair’s losses for the week were then extended following the post-ECB USD strength which saw the pair slip below 1.6400. Looking ahead, attention for the pair now turns towards UK trade balance, industrial production and manufacturing production as well as any BoE rhetoric as participants continue to speculate over the split on the MPC regarding the future path of the central bank’s monetary policy.

USD/JPY

The pair started the week with steady gains as it reached its highest level since July 2013 amid broad-based JPY weakness. This move to the upside was extended throughout the week as the pair took out a touted option barrier through 104.50 as it headed towards 105.00, a level which it eventually broke above alongside the strength observed in the USD index. With the BoJ proving to be a non-event this week, the movements in the USD index dictated the bulk of the price action for the pair as the subsequent USD strength following the ECB rate decision saw the pair print its highest level since October 2008. Looking ahead, the key releases out of Japan next week will be the final GDP reading, BoJ minutes and trade balance, although any further developments in the geopolitical situation could provide the pair with some direction.