As usual, euro did not react to the European Central Bank’s
monetary policy decision until ECB President Mario Draghi started the press
conference. The currency trended higher
throughout Draghi’s speech, taking out 1.35 and 1.36 levels in the
process. Although many investors may
wonder what Draghi said to drive the currency up nearly 1 cent, it was what he
didn’t say that set off the rally in the currency.
The ECB President did not express any major concerns about
the crisis in emerging markets, increased worries about inflation, monetary
conditions or the economic outlook. His comments were virtually unchanged from
January and given the recent pressure on the EUR/USD, the lack of increased
concerns about growth or inflation disappointed the bears and drove the
currency pair sharply higher.
Lets be clear, the ECB maintains a bias to ease. Without any ambiguity, Mario Draghi said they
would take further decisive action if needed.
He indicated that rates would remain low for an extended period of time
because of the prolonged period of low inflation and downside risks to growth.
However the difference between this month and last month is
that Draghi acknowledged the encouraging signs in the recovery, pickup in
consumer demand, rise in confidence and stable savings rates. In January, he ignored all of the
improvements in German data and spent most of his speech taking about low
inflation.
Draghi’s slightly more positive outlook on the economy
single handedly drove EUR/USD above 1.36 even as he warned that the central
bank needs to remain extremely cautious because the recovery is fragile and
uneven.
As for the future of monetary policy, Mario Draghi
reiterated that worsening inflation or unwarranted market tightening as
triggers for additional monetary actions.
However the recent signs of recovery reduce part of their concerns about
lower inflation and money market rates have been stable. At the end of the day,
the ECB is in no rush to increase stimulus and did not move closer to easing
this month, which is enough for EUR/USD traders to bid up the currency. If EUR/USD holds above 1.36, the stop will be
1.37