Euros post ECB downside only goes so far

Headlines focus on a clear warning from the ECB that risks to Eurozone growth have “moved to the downside”.

The “downside”, again

However, the comment varies from an assessment Mario Draghi offered at the bank’s previous post policy-meeting press conference, in December, only marginally. Then, the balance of risk was “moving to the downside” (emphasis mine). Furthermore, the words, “downside” and “risk(s)” are peppered within ECB commentary throughout last year before becoming more emphatic in more recent months. This tells us that the surprise factor is, or more to the point, should not be, very high.

Retreat

Yet whilst global markets had quite a cushion to absorb Thursday’s event risk following a corporate earnings-fuelled rebound, a retreat from the day’s best levels was palpable after Draghi. To be sure, markets were also trying to square simultaneous mixed messages from U.S. Commerce Secretary Wilbur Ross ahead of next week’s crucial Sino-U.S. trade talks. Still, swooping Eurozone yields and failure of the hypersensitive single currency to quickly shrug the words off suggests alternative interpretations.

Do we understand?

As ever, the key is often away from headlines and on subtle shifts in commentary elsewhere. Most notably, whilst Draghi reiterated infamous “through the summer” guidance as an approximate date when historically low rates would end, he also signalled that market expectations were on the right track:

"When markets place the first rate hike in 2020, they are using the state contingent part of our forward guidance...and it shows that they have understood our reaction function…"

This was an abstruse form of words at best, but it did have a tint of forward guidance about it. As such, markets, which had already reduced probabilities of a rate rise in 2019 to below 40%, took the comment as a step towards official confirmation. If that’s an accurate reading, it reduces ambiguity further in the short term in a way that’s bearish for the euro, whilst in the slightly longer term, the interpretation is more bullish. If, that is, a change in forward guidance is approaching

Euro holds above $1.13

So, whilst the euro tacked to a new five-week low in reaction to the ECB, basic support around $1.1310 is holding. The $1.12-$1.115 range that has constricted the rate almost completely since October remains intact. For sure, the euro’s technical chart is little short of sickly, as befits a currency facing a possible economic slowdown, Brexit and ambivalent-to-negative trade risks. $1.1310 confirmed support could well be breached again, with oscillators, like the relative strength index (RSI) and key moving averages (not shown below) tilting lower. But price action following the ECB’s statement could be promising for upside and sustained weakness from here may require a more definitive dollar revival.