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ECB Recap Draghi Sticks to the Script EURUSD Bears Eye 16Month Low Near 113

Article By: ,  Head of Market Research
October 25, 2018 1:15 PM

As my colleague Fawad Razaqzada noted earlier this morning, there was little reason for the European Central Bank to provide a boost to the euro and that the odds favored a slightly more dovish tone (see “Will ECB Drag EUR/USD Lower?” for more) …and that’s exactly what we’re seeing in the wake of the meeting.

ECB President Draghi generally stuck to the script in his press conference, giving no hints that the central bank would reconsider its plan for monetary policy after the run of weak economic data. Draghi did note that the economic data has been “somewhat weaker” than anticipated, but that it was consistent with the ECB’s outlook and not necessarily a prelude to an economic downturn.

In noting that the economic risks remain balanced, he also highlighted concerns about Brexit, trade, and Italy, though he did express optimism that a deal on Italy’s budget would be reached. The ECB should have more clarity on all three of these issues (as well as the recent slowdown in economic figures) by its December meeting, and while Draghi and Company are still highly likely to wind down the central bank’s asset purchases by the end of the year, Draghi did mention targeted long-term repo operations as a possible non-QE stimulatory policy that the ECB could adopt if needed.

Market Reaction

The yields on both German Bunds and Italian BTPs ticked higher as Draghi spoke (indicating selling in the sovereign bonds) but have since retraced most of those moves. Mirroring the move in yields, EUR/USD initially ticked up to new daily highs at 1.1430 before reversing to trade at a fresh 10-week low under 1.1370 as of writing.

Moving forward, EUR/USD remains in a broad 1.13-1.18 range with both the longer-term trend (leading into the range) and the short-term trend (since the late September peak) pointing lower. Bears will likely look to push the pair down to retest the 16-month low near 1.1300 next, with a break below that level opening the door for more weakness toward 1.10 or 1.11.

Source: TradingView, FOREX.com


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