ECB Needs to Act Now

Mario Draghi should act now rather than later if he wants to stem the rising Eur/Usd tide. His patience has seemed to have worn thin, telling reporters in Washington this past weekend, “The strengthening of the exchange rate requires further monetary stimulus”. That weekend warning helped spook the markets into selling Eur/Usd down to 1.3800 from 1.3880, not that impressive. To the market, Draghi has become the boy who cried wolf, bemoaning the strength of the Eur/Usd for weeks and making idle threats to enact some form of QE. Traders get immune to that kind of empty rhetoric and they love a challenge, they will continue to buy the currency daring the ECB to act.

Why wait? Inflation is not a concern, running at less than half of the ECB’s goal and at its weakest level in four years. This number would only continue to head lower as the exchange rate grinds higher. Most economists believe the ECB will act during their June meetings but it may more of a challenge by then. The reason he needs to act now is the Eur/Usd is within striking distance of 1.4000.  If it gets above that level there is absolutely nothing standing in its way, from a technical perspective, and could reach 1.4500 before June. Enacting some form of easing at those levels may only serve to get the Eur/Usd down to where we are trading now.  

Draghi got the response he wanted from the markets when they sold Eur/Usd Monday morning after his comments in Washington. Why not take the next step while he has the Eur/Usd down and trying to regroup. Why not cut interest rates now instead of at a scheduled meeting, does 25 bps really make a huge difference to the economy? But to a market that has been calling your bluff for weeks now, that would be a wakeup call. Traders hate surprises and I believe he would get the sell-off in the Eur/Usd that he so desperately seems to want, and from a much lower level

Categories: News and Commentary

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