The pair opened last week around 1.2800 and muddled around about a 50 pips north and south until the ECB meeting on Thursday. The initial reaction to Draghi's somewhat dovish prepared statement was a headfake to the week's low at about 1.2740, but it then slowly crept back as Draghi answered questions and eventually skyrocketed for an impressive 210 pip reversal to close the day close to 1.2950. Specific talking points that triggered upward movement:
- PIs show no risks to price stability
- discussion of the broken monetary transmission to peripheral SMEs and how further rate cuts would be ineffective at fixing this
- strong reaffirmation that the Cyprus bailout will not be a template
- strong reaffirmation that pundits/blogosphere underestimate the political capital invested in the EU and that a member exit is not considerable - "there is no plan B"
The upward movement continued to 1.3040 on Friday after the big US NFP miss, before settling to close the week slightly under 1.30. This close brings the pair back to 75 pips of where it was trading prior to the Cyprus debacle.
Other interesting developments during the were a somewhat softening of the contraction in EZ PMIs (speaking very broadly here) and the plunge in Italian debt yields. One cannot help but wonder about Draghi's role here given his tight-lippedness over his conversation with Italian PM Napolitano coupled with his continued efforts to keep OMT criteria vague (call me a conspiracy theorist I guess).
Outlook
The market's QE ending and long dollar index sentiment looks to be under fire given last Friday's alarming NFP number. The market will be on edge for any signs of slowing economic news/data out of the US. I favor going long other pairs vs USD. I will however get long EURUSD on a short term basis.
Mon
The risks from Portugal's weekend repeal of austerity measures seems muted so far. There was a minor gap on the Asia open that has since been filled. Will have to continue to monitor this, but it again opens up the downside risk possibilities, so I want to keep any long positions on a short leash.
Light data day. EZ investor confidence and German industrial production. Expectations are already low. No US data releases. Bernanke will speak at 7:15pm EST. My feeling is that any of the EZ data coming in even slightly better than expected will push the pair higher toward 1.31, whereas inline data and slightly worse data shouldn't have much affect given the ECB's last meeting.
Tue
Another light data day. Trade balance data for Germany and France. US Redbook Index. Barring anything major out of Europe, we could see a continuation upwards of the EUR here. Continue to keep long positions tight.
Wed
One of the week's big USD events will be the relase of the FOMC minutes on Wednesday at 2:00pm EST.
<more details to come Monday>
