European update – Draghi casts doubt on rate cut

ECB stimulus incoming

The euro saw a surge in volatility around the ECB rate decision, which is to be expected when the market is split, as it was, on whether it will cut by 10 basis points or not.

 

OANDA fxTrade Advanced Charting Platform

As is often the case with these announcements, the reaction comes in two phases, firstly to the decision itself and then to the text that accompanies it. It’s therefore no surprise that the euro didn’t hold onto its gains for long because what was initially viewed as euro-positive announcement was more than countered with some very dovish statements that hinted at monetary stimulus soon and a revelation that committees have been tasked with examining various stimulus measures.

The most noteworthy of these was the reference to size and composition of new net asset purchases, given the difficulties the bank was facing on both of these prior to gradually reducing them to zero at the end of last year. Due to the limited room for rate cuts, this is the most obvious way for the central bank to provide stimulus to the euro area economy.

In the mean time, a 10 basis point rate cut may have to do, although it may be largely symbolic at these levels. That’s what the market has been betting on which may explain the knee jerk response to Draghi’s claim that a rate cut was not discussed at the meeting. That was enough to push the euro into positive territory on the day, although traders may later reflect on this differently. Just because they apparently didn’t discuss it today, it doesn’t mean they’re not planning to in September.

EURUSD Daily Chart

What continued to be clear throughout Draghi’s press conference is that the ECB feels like it needs to do more but in order to do so, it needs to continue to explore unconventional measures. Repeated references to low inflation, both realised and projected, further affirmed these points, as well as they insistence that the ECBs target is symmetrical meaning that while their target is below but close to 2%, it’s not capped.

This is important at a time when there have been reports of the ECB discussing the appropriateness of its mandate, which Draghi confirmed was discussed by the governing council. There is clearly a feeling that the central bank should be doing more and perhaps this is why they are suddenly stressing the symmetrical nature of the target as it affords them a little extra room to provide stimulus.

Whatever stimulus the ECB opts for, its clear that something is coming and probably sooner rather than later. They could be forgiven for waiting until October when the new President takes charge but such clear hints today may suggest they won’t.

Market Snapshot

Source – Thomson Reuters Eikon

Oil higher as inventory data sinks in

Oil prices are climbing on Thursday, largely reversing yesterday’s declines and perhaps better reflecting the inventory data we’ve seen this week. The large drawdowns have been largely linked to the storm in the Gulf of Mexico and shutdowns that resulted, but the response has still appeared to be one of confusion. Oil rallied into the API release before pausing and then sold off shortly after the EIA release after a brief spike. Clearly traders were putting a lot of emphasis on the outages but may have since changed their tune.

Brent Daily Chart

Gold steady but vulnerable near-term

Gold is relatively flat today which will be encouraging for bulls that had maybe seen the recent weakness as a risk for near-term price action. A lot of people seem to be gold bulls longer-term but after such a strong rally since early June, the near-term outlook looks a little uncertain and a partial pullback would be understandable. It has currently stalled around $1,420 but doesn’t seem to be gathering much upside momentum yet which may suggest $1,400 support will be tested before the highs are.

Gold Daily Chart

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

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.

Craig Erlam

Craig Erlam

Senior Market Analyst - UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a Market Analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam