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EUR weaker post-ECB – Danske Bank

FXStreet (Edinburgh) - Senior Analyst at Danske Bank Pernile Nielsen assessed yesterday’s ECB gathering.

Key Quotes

“As expected, the ECB meeting yesterday provided little news and resulted in limited market reaction”.

“However, Mr Draghi actually surprised a lot as he made some very unusual comments on the currency”.

“The dovish comments on the euro ‘only’ triggered a half figure decline in EUR/USD. However, it was indeed very interesting that Mr Draghi commented on the euro exchange rate and it seems to confirm that EUR/USD trading in the 1.40s indeed was one of the triggers when the ECB decided to cut rates and introduce the new TLTRO two months ago”.

“Overall Mr Draghi signalled that he is pleased with the recent decline in the euro’s exchange rate and said that “the fundamentals for a weaker exchange rate are today much better than they were two or three months ago”.

“In addition, he also offered a long list of reasons why the euro has weakened including less capital flowing into the region, a reduction in euro holdings by other central banks, and increased expectations that the Fed will raise interest rates far in advance of the ECB”.

“Finally, Mr Draghi said that “markets have perceived that monetary policy in the euro and US are and are going to stay on a divergent path for a long period of time”.

“We agree with Mr Draghi on that and we still look for a gradual decline in EUR/USD towards 1.26 in the coming 12 months, primarily driven by a divergent monetary policy between the two central banks”.

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