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The EUR/USD experienced a two-sided market this morning as European Central Bank President Draghi’s plan to begin buying sovereign debt failed to generate the anticipated buying interest. In other words, he appeared to deliver what traders have been expecting while bringing nothing new to the table. Today’s volatile trading action suggests “a buy the rumor, sell the fact” situation. This is the typical reaction to news that has been baked into the price action since late July when Draghi vowed to do “whatever it takes” to preserve the Euro.
On Thursday the ECB left interest rates unchanged as expected, but in the press conference following the meeting, Draghi said the ECB would launch an “outright monetary transaction” plan. On Wednesday, news of the program leaked to traders, triggering a rally in the Euro. This rumor turned out to be very close to the plan announced by Draghi at the press conference.
One reason for the market’s apparent disappointment with the announced plan is that neither Spain nor Italy appears to be willing to cooperate with the provision that they make formal announcements for aid. Another reason for the Euro’s weakness could be disappointment that the central bank did not announce lower interest rates along with the plan as many have concluded that this action could lead to increased economic growth.
The disappointment in the ECB’s announcement sent traders into the U.S. Dollar which put pressure on other currencies. The GBP/USD is also trading lower this morning in reaction to the strength in the dollar. This morning the Bank of England announced that it would keep interest rates at historically low levels as well as refraining from additional stimulus at this time. The Sterling rallied initially after the central bank’s announcement on short-covering. Some traders who were looking for the announcement of additional asset purchases to weaken the British Pound were forced to cover their positions.
The rally was muted by the reversal in the dollar; keep the technically challenged GBP/USD inside of its long-term range. Reports that the government may be preparing to ease some of its austerity measures in an effort to bolster the economy could help to underpin the market over the near-term.
Despite the stronger dollar, both December Gold and October Crude Oil are trading better today. Gold futures rallied after Draghi announced his plan as investors believe it could lead to inflationary pressure. Speculators are also driving up crude oil in anticipation of increased demand from the Euro Zone. They feel that Draghi’s plan could lead to immediate improvements in the Euro Zone because it lifts the veil of uncertainty which may have been holding back economic expansion.