Mike Paterson’s Forex Update

Despite a post rate-cut move higher to 1.3454, matching the highs of the previous rally, EURUSD was then sold down to 1.3313 on unexpected comments from ECB President Draghi.

During the press conference he effectively moved the goal posts by stating that the ECB would not finance European governments by lending to the IMF to then bail-out debt ridden nations, stating that it was it in the European Treaty. Such a finite stance was not what the market was expecting or had priced into bond prices and we saw a Euro sell-off across the board. Furthermore he said there had been no discussion on a bigger rate cut today and that the ECB did not discuss capping bond yields.

Markets were expecting additional “non-standard” liquidity measures from the ECB during the press conference, and indeed it got them including two LTROS (Long Term Re-Financing Operations) of 36 months duration, full allotment for banks at fixed rates, easier collateral rules for asset-backed securities and central banks being allowed to accept bank loans as collateral. What the market wasn’t expecting though was the ECB effectively shutting the door on further assistance, and Draghi was keen to point out that he was surprised the market misinterpreted his comments last week about the ECB helping out if the EU got its act  together. Given what he said it’s difficult to see quite how we were to think otherwise.

FX Update

FX Update

EURGBP fell in line with the general wave of selling and we saw strong support at 0.8510-20 breached to touch new recent lows of 0.8496 (GBPEUR up to 1.1770), while EURCHF gave up ground to touch the 1.2330 area. We’ve seen rallies in both pairs since but traders remain nervous.

With the vital EU summit shortly to get under way it’s difficult to imagine that the EU leaders were not aware of the ECB’s now-clearly stated position and one might conclude that Draghi has been collared by Chancellor Merkel. Either way they’ve got to have something else up their sleeves or the problems they face in finding a solution just got a whole lot worse.

Interbank Rates as of 15:18 GMT

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Mike ‘Oscar’ Paterson has been in the Forex trenches for nearly three decades working as a senior Spot trader in London at UBS, Chief Dealer FX at the State Bank of Victoria and in charge of Spot CHF at Credit Suisse with a daily turnover in excess of $1.5 billion. Mike now works as an independent consultant providing a fully bespoke service to the corporate and private sectors in physical FX delivery as well as guiding those who wish to improve their currency trading. Mike also presents seminars and workshops and writes for a number of publications.
To contact Mike please call +0044 (0) 1732 700383 or email mike.paterson@economicvoice.com
The views expressed above are those of the author and should not be taken as investment advice. MSP Foreign Exchange Services will have no liability for, or to, any persons executing trades based on the content above.

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