Draghi, Davos & The Dollar
If European Central Bank President Mario Draghi had wanted to push back against the euro’s recent rise, he could arguably have been more forceful than turned out to be the case when speaking yesterday at the ECB press conference. The ECB president, well versed in getting across his message to markets, merely said that “Recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.” With Wednesday’s observations of US Treasury Secretary Steven Mnuchin fresh in its mind, it was perhaps no wonder then, particularly with the ECB trumpeting the strength of the euro zone’s recent economic performance, that the currency market took out the key psychological $1.2500 level in EURUSD, presumably triggering a multitude of forex option knock outs and stop losses in the process, before drawing breath and edging back down onto a $1.24 handle in Thursday’s late European session. But where next? Might the euro be due a period of consolidation after such a good run? Perhaps. Traders will have their own views.
But one thing traders might be thinking is that while US Treasury Secretary Mnuchin certainly tried to dial back a little bit on Wednesday’s comments, in his Davos panel appearance on Thursday he didn’t sound like a man who was necessarily wedded to the strong dollar mantra of his predecessors back to Robert Rubin. “Where the dollar is now is not a priority, it’s a focus of the free markets,” Mnuchin said. “In the short term, where the dollar is is not a concern of mine. It will fluctuate. In the short term there are obviously benefits and issues with a lower dollar.” Traders might conclude both that a slightly more nuanced approach from Mnuchin cannot realistically be interpreted as a comprehensive disavowal of his previous comments on the USD and that Draghi didn’t seem overly concerned (as yet at least) by the euro’s rise. The fact that US President Donald Trump, himself arriving in Davos, found it necessary to say that the “dollar is going to get stronger and stronger and ultimately I want to see a strong dollar” may have helped arrest the pace of the USD’s fall in the short term but if the currency market has concluded that Treasury Secretary Mnuchin doesn’t have a problem with a downward trajectory for the greenback, the respite may not last too long.
Written by Neal Kimberley, External Currency Analyst.