Euro Reverses Higher after Draghi’s Mixed Remarks

Euro traders posted a volatile outside move on the daily chart on Thursday, following the European Central Bank’s (ECB) interest rate and monetary policy decisions, and the customary press conference from ECB President Mario Draghi. The price action suggests that traders weren’t surprised by the results, which some say had been telegraphed for weeks. Traders will have a few days to digest the fresh information before they have to deal with the U.S. Federal Reserve’s policy decisions on July 31.

A consensus of news reports seem to agree that the ECB used today’s announcement to prepare the financial markets for more easing measures at its next policy meeting on September 12. Initially, traders read the data as dovish, driving the Euro into a two-year low against the U.S. Dollar. When bearish traders couldn’t trip enough sell stops to spike the currency lower, a short-covering rally ensued, turning the EUR/USD higher for the sessions. The price action suggests a classic bear trap, or a “sell the rumor, buy the fact” move.

ECB Keeps Rate Cut on Hold

In its monetary policy statement, the ECB said it expects its benchmark interest rates to remain “at their present or lower levels” at least through the first half of 2020. This change in the language from previous statements was also a suggestion that rate cuts could be coming in the near future.

Draghi Offers Mixed Message

The EUR/USD fell to a two-year low after the ECB’s change in guidance. Additionally, the German 30-year bond yield hit a record low of 0.167%. However, both the Euro and German bond rebounded enough to turn higher for the session after Draghi suggested that some members of the ECB weren’t convinced on certain aspects of a possible stimulus package.

“Draghi told CNBC’s Annette Weisbach that all ECB members agreed that further stimulus was needed, though there were differences regarding the various elements of any program. ‘We had a broad discussion,’ he said, ‘Whenever we have a package so complex as this, you’d expect that people have different nuances about the different parts of the package.’”

Draghi also said in his press conference that the risk of a recession in the region was low, adding further to his mixed message and driving the EUR/USD even higher.

Price Action Suggests Traders Need More Details

The early weakness in the Euro, followed by the dramatic reversal and the higher close suggests investors received what they wanted to hear and are now waiting for more details about the ECB’s plans in September. Additionally, traders are now likely to begin positioning themselves ahead of the U.S. Federal Reserve monetary policy decision on July 31.