Week In FX Europe – Central Banks Dominate Forex Trade Action

The ECB has finally grabbed the markets attention. Draghi’s words this week have certainly hooked investor’s interest for next month’s meeting. Asset class should be expecting greater volatility right up to the next rate announcement and press conference.

Are investors being led down a similar path they took in March when Draghi vocally tried to undermine the EUR’s strength? This time seems different as Draghi dropped very strong hints at possible policy action in June.

Focusing on three sets of possibilities while expressing the Bank’s serious “concerns about the strength of the currency” has the market anticipating a refi rate cut at that meeting. It’s clear that Draghi has abandoned previous ECB president’s belief that the ECB never “pre-commits” – he noted if needed, that the committee had laid the foundation for action in June.

His fighting words have created a unique problem for Euro policy makers – Draghi has made it hard for the ECB not to come up monetary action on June 5th. A large percentage of the market has interpreted his comments this week as a sign for action. It’s a reasonable assumption, but by no means a given. The question remains, what exactly will the ECB do?

There were no surprises from the Bank Of England. It left main interest rates (+0.5%) and the total size of its bond buying unchanged (£375m) at their first meeting since unemployment tumbled past a benchmark (+6.9% vs. +7%) that Carney and company had set out nine-months ago.

Attention now turns to the Inflation Report (May 14th) and the minutes of last weeks meeting (May 21st). Both should provide greater insight into UK’s rate outlook. The market will also get a better insight to the dove/hawk scale.

WEEK AHEAD

* GBP Employment Change
* GBP Bank of England Inflation Report
* JPY Gross Domestic Product
* EUR Euro-Zone Consumer Price Index
* EUR Euro-Zone Gross Domestic Product
* EUR Euro-Zone Consumer Price Index
* USD Consumer Price Index

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell