Draghi warns on growth

By David Morrison  |  24/01/2019 15:23

The euro has come under concerted selling pressure today following disappointing data releases and a bearish outlook from ECB President Mario Draghi

As expected, the ECB left rates unchanged at its first monetary policy meeting of 2019. The central bank’s statement was met with total indifference by traders with the EURUSD hardly budging on its release. However, the pair lurched lower as ECB President Mario Draghi began his press conference. During his introductory comments Mr Draghi said that risks to the euro area growth outlook had shifted to the downside. He also reaffirmed that the central bank would keep its key interest rates unchanged through the summer of 2019, or longer if necessary. The EURUSD immediately fell to within spitting distance of support around 1.1300 before bouncing sharply. By the time the ECB President had finished his press conference, the EURUSD was heading back towards the session’s highs.  
 
Weak data

The euro had come under selling pressure on Thursday morning following the release of a clutch of disappointing European Flash PMI numbers. Germany’s Manufacturing sector registered contraction for the first time in five and a half years, slipping below 50 from 63.3 in December 2017.  There was some better news from German Services which perked up a bit, but overall, the IHS Markit Euro zone Composite PMI® fell to 50.7 in January from 51.1 in December, its lowest since July 2013, and dangerously close to contraction territory. The news saw the EURUSD pull back sharply to trade below 1.1350, having looked on course to break above 1.1400 overnight.
 
EURUSD - directionless for now?
 
The EURUSD took a sharp leg down between September and November last year. This pull-back corresponded with a rally in the dollar. Investors piled into the greenback as they sought out safe havens amid the dramatic sell-off in global risk assets. This saw the EURUSD hit a 17-month low just shy of 1.1200 in November last year. The euro has steadied since then and has managed to carve out a succession of higher highs and higher lows suggesting that a recovery may be on the cards. However, the overall technical picture is one of confusion given the New Year FX ‘flash crash’ and the US Federal Reserve’s sudden dovish pivot which saw the EURUSD slump then soar in the space of a week. But having climbed above 1.1550 little over a fortnight ago, the EURUSD has fallen back sharply, giving us a retest of support around 1.1300 earlier today. While analysts have drastically reduced the probability of Fed rate hikes this year, there’s also a belief that the European Central Bank (ECB) will find it impossible to tighten monetary policy this year, given the growing evidence of economic weakness across the single currency bloc.
 
S&P chart
 
Just as Mario Draghi began his press conference, US Commerce Secretary Wilbur Ross was on CNBC saying that the US and China were still “miles and miles” from agreeing a trade deal. He said that this should come as no surprise given the complexity of trade between the two countries and finding a deal that would work for both. His comments led to a sharp mark-down in pre-open US stock index futures before he rowed back a touch by saying there was a “fair chance” that the two sides arrive at a trade deal. Looking at the daily S&P chart, it’s apparent how significant the 2,630 level has become. This marks a triple bottom and the 50% retracement of the October-December move which saw the index lose 20% of its value. Then followed a stunning rally which saw the S&P put in a 13% bounce in less than a month. This took the index back above 2,630 although it has repeatedly run into overhead resistance around the 100-day moving average. So far this week, the index has managed to hold above this level raising the possibility of further gains to come. However, some analysts believe that the New Year rally has run out of steam and that it won’t take much in the way of bad news to bring about a break of support. If so, they argue, then a retest of the December 2018 lows can’t be ruled out.




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