Thursday, November 26, 2015

Mr. Draghi can move the market | Will he do so again next week?

Now that the Euro is heading, seemingly inexorably, for the big figure of 1.05 U. S. dollars, it is appropriate to reflect on what has given rise to this recent very significant move down.

It can be traced back with precision to the words uttered by Mario Draghi during his press conference after the last ECB monetary policy statement, on Oct 22nd. He said at the time, and we quote “The degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting”. This caused an immediate move down in the Single Currency which we opined at the time might turn out to be ‘structural’.

And this has proved to be the case. A structural change in the movement of a currency pair occurs when it either suddenly reverses its trend or breaks out of its range, if it had been range-bound. The daily chart above shows that it had, prior to Oct. 22nd, been in a range that was bounded by its 200 Day Exponential Moving Average (EMA) on the upside and the big figure of 1.11 on the bottom.  Since that day it has resolutely been in a downtrend.

Will he do so again next week?

Will Mr. Draghi do something similar at his next monetary policy press conference, which takes place next week, on December 3rd?

There are strong reasons for believing that the ECB will attempt to further stimulate inflation in the Eurozone at its next monetary policy meeting, by accelerating QE or by further lowering rates, or indeed both. But there will be opposition, most notably from the German central bank, whose economy is doing very nicely, thank you, and who will not want any further stimulus, both on principle and as there is no need for it in that particular Eurozone member state.

As far as the EURUSD is concerned, all of this might, just might, be priced in. If it is not, then parity between the Euro and the U.S. dollar is bound to become a real possibility.

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