Draghi Focused on Downward Inflationary Pressures
Much of the ECB President’s speech was about subdued inflation and the causes of it. The part that the market particularly reacted to a reaffirmation that policymakers were open to easing further.
Here are some quotes that stood out from his speech:
- “As I emphasized at our last monetary policy meeting, we are committed, and are not resigned to having a low rate of inflation forever or even for now.”
- “We will pay close attention to underlying inflation dynamics and to risks and will adjust policy appropriately.”
- “In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.”
- “Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools.”
I think this is a classic example of a speech where the content is vague enough that one could either argue that it is dovish, or not all that different from prior rhetoric.
It’s not exactly new to hear Draghi, or any policymaker these days for that matter, to say they will introduce new stimulus if it is warranted. Especially in the case of the ECB who just introduced easing measures at their meeting earlier this month.
I do find it interesting that he emphasized so much on low inflation and that he decided to discuss this one day before the Fed meeting.
The markets have responded strongly to Draghi’s speech with EUR/USD dropping about 50 pips roughly an hour after his speech.
EUR/USD has fallen through some major levels. First, the pair has fallen below its 100 and 200-period moving averages on a 4-hour chart. Second, EUR/USD failed to hold above a significant horizontal level at 1.1204. It is considered important because it confluence with the 61.8% measured from the June low. Also, the 4-hour 200 MA falls close to it.
The breach of the major price point reaffirms that sellers remain in control.
The next level of support that I see falls at 1.1176. This level marks the March low and has previously acted as support.
- A break below the psychological 1.1200 handle is significant. Overhead resistance for the session ahead falls at 1.1204.
- I see support at 1.1176.
- Tomorrow’s Fed meeting will be important. This upcoming event might limit the scope for downside in EUR/USD today.
This article was originally posted on FX Empire
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