Overnight, the euro traded in a massive 255 basis-point range as traders digested the outcome of the ECB meeting.
After initially bouncing to a high of 1.2405 after the ECB left rates on hold at 0.75%, the sellers moved in quickly after it became apparent from Mario Draghi’s press conference that it wasn’t going to get the stimulus measures it had hoped for. To be fair to Mr Draghi, his strong words in support of the euro last week were not accompanied by any timetable.
It was the market’s interpretation of imminent action that led to the week-long rally in risk assets and last night’s inevitable disappointment. While Mr Draghi did flag recommencing the bond-buying option as many had hoped, there were certainly no game changers. Mr Draghi also acknowledged that a rate cut was discussed, and dismissed the prospect of the ECB granting a banking license to the ESM in its current form. Then he added a fresh twist in his description of ’new‘ bond purchases that would be ’very different‘ from the SMP and would focus on the shorter end of the yield curve. Mr Draghi's inability to clarify whether such purchases would be limited or unlimited, let alone sterilised, simply added to the market confusion. To sum things up, while the market may ultimately get what it wants, it may not in its hoped timeframe.
The next few weeks are likely to see the ECB working closely with the Bundesbank and representatives of the bailout funds to get them to buy their plan. Having ended yesterday’s Australian session around the 1.2255 level, the euro hit a high of 1.2405, before crashing to a low of 1.2134, to eventually close US trade at 1.2180. Upon resuming for Asian trade the euro is essentially unchanged.