Binary bets of the week: Draghi Dares and Pound Worth A Punt
By Dave Evans of binary.com
Draghi Dares
The euro plunged to its lowest levels since July 2013 on Thursday after ECB president Draghi announced bolder than expected moves on interest rates. The marginal lending facility, short term repo rates and overnight deposits were all cut to record low levels. The cut in headline rates to 0.05% was what surprised markets the most, with no changes expected this time.
EUR/ USD daily chart
As widely expected, the ECB announced plans for its asset backed and covered bond purchase program, though Draghi was vague on the specific details of this.
This is good politics as it does not commit the ECB to a large program, adding some flexibility when the vote for the program does not appear to have been unanimous. With the board comprising of 18 individuals from diverse member states, it would be more surprising if there was unanimity, especially considering Germany’s known opposition to such plans.
Some investors were let down though as they wanted to see confirmation of full blown Quantitative Easing – or outright purchases of sovereign debt. While short term bond yields sank on Thursday, 30 year bonds yields actually increased as the odds of full Quantitative Easing appear to ease.
Draghi also signalled that investors should not wait for lower rates by indicating that they had reached “absolutely the lower limits”.
With rates potentially having found a floor and an asset purchase program that stops short of full blown Quantitative Easing, there could be an argument that there is upside potential for the euro for here. Rates cannot go any lower and Draghi cannot push through bolder asset purchase plans without a stronger mandate from ECB constituent members (especially Germany).
However, the key issue is still about growth and whether the structural imbalances within the Eurozone can be addressed by these moves however bold they are.
The jury is still out and the ECB may find it has to dramatically upscale the size of its asset purchase program if it is to have any impact. Perhaps it is taking a softly softly approach with certain members who would baulk at a huge program right off the bat.
The upshot is that while rates may have hit a floor, there is still more room for a bigger asset purchase program that could drive the EUR/ USD even lower. Indeed, the EUR/ USD monthly chart below shows that the EUR/ USD is still above its lows from previous years despite this month’s dramatic fall.
EUR/ USD Monthly
Pound Worth A Punt
The British pound has not been immune from the euro’s selling pressure, with Monday’s dire manufacturing figures not helping matters. However, the British economic and interest rate policy is still generally on a different trajectory to the euro. Interest rate increases may have been pushed further into the future, but at least the cycle is a positive rather than a negative one.
As the monthly chart below shows, there is a huge space below current levels which have acted as something of a floor since 2007.
With downside potential for the euro from here against the dollar, it could pay to bet on further downside against the pound.
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