Let’s face it, expectations were set pretty dovishly for the ECB rate decision. With disappointing economic reports coming out day after day and the Cyprus bailout deal reigniting concerns about the euro zone’s debt problems, traders were expecting a pessimistic statement from Mario Draghi. And to a certain extent, Draghi did deliver.
He might not have announced any changes in monetary policy, but he did mention that policymakers went through an “extensive” discussion of interest rates and that the ECB stands ready to act if the need arises. Am I the only one that smells a rate cut coming?
In assessing the economy, he also added that economic weakness spilled over into early 2013, and he basically gave an uninspiring outlook for the region, citing downside risks to the economy.
Yet in spite of all this, the euro managed to end Thursday on an extremely strong note. What led the euro to stage such a crazy comeback?
Draghi assures the markets that Cyprus is “no template” for future bailouts.
The markets were spooked out when they learned about the deal that Cyprus accepted to secure its bailout loan. I mean, who wouldn’t be? It involved raiding the savings of depositors for crying out loud! Investors were afraid that this agreement would lead to a bank run and might set a precedent for future bailouts.
But in the press conference following the rate decision, Draghi responded to these concerns by saying that “Cyprus is no template.” What this basically means is that what was applied to one country will not necessarily apply to another, so there’s no need to worry about the governments reaching into depositors’ coffers again.
Furthermore, when asked what would happen if a country were to exit the euro zone, he answered that there is “no plan B,” which suggests that European officials will do all they can to keep the region intact. This strong resolve to keep the euro zone together seems to have inspired confidence in the markets because what followed next was a massive euro rally.
Short squeeze on the euro?
Many believe that the ridiculous rally we saw on the euro was the result of a short squeeze. For those of you who are unfamiliar with the term, a short squeeze occurs when sellers are forced to cover their short positions, resulting in a sharp rise in price. It’s basically like hitting the NoS on a racecar for an added boost!
Some think that the massive move we saw on EUR/JPY might have also had spillover effects on EUR/USD. After all, EUR/JPY climbed over 500 pips on Thursday, the largest single-day rally on record!
When buyers started to push EUR/USD higher, it could have triggered some stops, which in turn increased market bullishness and lifted price up to new heights.
No doubt, the euro’s performance that day was extremely impressive – one for the books. But with the prospect of a rate cut looming over the shared currency, one can’t help but wonder if these gains will eventually be erased. Do you think the euro has what it takes to continue trading higher?