Euro weakens on ECB mixed messages

Growth forecasts cut for 2014 through to 2016 while inflation may fall back to zero per cent, but no new measures announced.
European Central Bank (ECB) president Mario Draghi addresses an ECB news conference. Kai Pfaffenbach / Reuters
European Central Bank (ECB) president Mario Draghi addresses an ECB news conference. Kai Pfaffenbach / Reuters

The European Central Bank (ECB) is still reluctant to act despite the euro-zone economy deteriorating faster than expected.

In its latest statement it cut the growth forecasts for 2014 through to 2016 and said that inflation may fall back to zero per cent, but did not announce any new measures. The reaction across all the main markets was genuine disappointment. With negative expectations for energy, the ECB still refuses to intervene, putting the euro-zone economy at risk of deflation over the next few months.

After the statement European and global equities tumbled while the euro rallied above 1.24. However, this rally was only temporary. Once the press conference was over some ECB officials informed selected media channels that the ECB has already prepared a range of quantitative easing (QE) packages which will be announced next month. This led global equities to ease their losses and the euro to tumble back below 1.2360.

These mixed messages are confusing for the markets. The ECB chief, Mario Draghi, insisted that QE will be announced in the first quarter of next year if it is needed. However, the later comments from ECB members implied that the decision has already been made. This lack of a coordinated position is a real concern and has increased the weakness of the euro.

The euro took another hit after the US jobs report figures came in much better than expected. It declined to well below the 1.23 support area. So far, it has reached as low as 1.2280 and is likely to remain under pressure. There is a consensus that the euro-US dollar will hit a solid support area around the 1.22 mark, which may hold for a few weeks. But regional investors do not believe that the pressure on the euro will ease until the ECB acts, so there is a feeling that in the new year a figure of 1.20 could be possible.

If Europe remains a concern traders should also keep an eye on the United States. There are signs that the global slowdown and end of QE are beginning to affect the economy. Last week factory orders showed a significant reaction to these issues, declining for the third month in a row. We have not seen three consecutive declines since 2012. Last time the factory orders fell for three consecutive months, the US Federal Reserve stepped in and announced QE3.

How will the Fed act now? With QE having been stopped it has few immediate options and must be hoping that the figures in last month’s US jobs report are solid and sustainable.

So this does mean that traders should be careful in trading the continued strengthening of the US dollar? If we do see a short- term change in the market sentiment towards the US economy in the upcoming weeks, we may see a round of profit-taking before it starts to strengthen again.

Nour Al Hammoury is the chief market strategist at ADS Securities

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Published: December 8, 2014 04:00 AM

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