Date: 21 Jul 2017

European Central Bank Chief Mario Draghi knows full well the value of a soundbite. Draghi also knows that the markets pay enormous attention to everything he says, as was proven in June after markets interpreted his speech in Sintra as having a more hawkish tone. Equally, Draghi would have been acutely aware that, as US bank BNYMellon wrote on Thursday, as the ECB Chief “started his testimony [yesterday], EURUSD stood 2.8% higher than at the time of [the Sintra speech].” With that in mind, if Draghi has misgivings about the euro’s post-Sintra rise, he could have chosen to make a comment alluding to that when he spoke yesterday. Merely saying that the repricing of the euro had received “some attention” didn’t fit that bill. The failure of the ECB Chief to make any substantial effort to lean against recent euro gains when the currency’s level suggested that on balance the market was long of euros into the press conference, and more particularly the currency market’s understanding that he had failed to take the opportunity to do so, understandably re-energized demand for euro/dollar on the day. With EURUSD having cruised through the $1.1616 May 2016 high yesterday, traders may be reluctant to charge in and buy euros at what are already elevated levels, even if banks such as the Netherlands’ ING are arguing that “there is more near-term EURUSD upside to come.” But nor may traders be too inclined to lean against the move. And that arguably gets us to the nub of the issue. Having observed that Draghi signally failed to overtly push back against recent euro appreciation, traders may conclude that buying dips in euro/dollar makes more sense than selling rallies. Mario Draghi is a very experienced policymaker. If he had wanted to curb the animal spirits of euro bulls, he could easily have done so yesterday. He didn’t. And the market is right to draw conclusions from that omission.

Written by Neal Kimberley, External Currency Analyst.