News From the ECB Moves Markets

If ever you wanted to see how important fundamental analysis is to understanding the forex markets and building a trading strategy yesterdays comments by European Central Bank President Mario Draghi dismissed the idea that the euro currency could break up, as he stated it was “irreversible “even as the ECB issued a report about the rising contagion risks posed by the sovereign debt crisis.

The markets and investors are edgy and every comment, press release, statement and rumor is affecting the markets.

Let’s follow the comments yesterday, as Mario Draghi made various different statements, speeches and comments during the day

Draghi, appearing before the European Parliament, said that the next year will be a painful one for European banks and the overall economy. But he said it was simply “morbid speculation” to talk about the demise of the euro.

“I have no doubt whatsoever about the strength of the euro, about its permanence, about its irreversibility,” he said. “The one currency is irreversible.”

The euro rose up 0.2% versus the dollar in trading Monday following the remarks.

In a later interview with the Financial Times, Draghi cautioned that euro-zone nations that depart the euro-area bloc would face severe economic difficulties, including high inflation. He also said that such nations would still need to pursue structural reforms.

This statement surprised the market as it seems to contradict his earlier statement in regards to the irreversibility of the euro stating it was “morbid speculation”

Investors are now asking which countries might leave the euro.

Another statement yesterday that surprised the markets was Draghi’s comments and rebuff of the possible downgrade of France’s debt.  “France losing its Triple-A debt rating shouldn’t be a “terrible thing” but that if France were downgraded, other nations likely would be as well.”I don’t know if France will lose its Triple-A. I hope not,” he said in response to a question of whether the nation will be downgraded. He further stated: ratings from the credit agencies are just one factor the ECB uses to assess collateral. Draghi, who again poured cold water on the idea of stepping up the pace of bond purchases, also said the U.S. needs to take structural reforms and said the U.S. labor market may be “too flexible.”

Markets dropped Draghi downplayed expectations that the ECB would be more aggressive in aiding struggling countries by widening its bond purchases, Draghi has reminded us over and over that the banks governing treaty “forbids monetary financing.”

The comments “put more nails in the proverbial coffin of having the European Central Bank step in as the lender of last resort,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

“That’s disappointing to investors who view ECB purchases of debt issued by European countries nearly squeezed out of the bond market as an important tool in ending the sovereign-debt crisis.”

“That’s one solution seemingly removed,” noted Luschini.

Losses increased after a statement from European Union ministers, said euro-currency members had agreed on providing additional bailout funding via the International Monetary Fund, but fell short of the total funding the markets are expecting.