Draghi challenges markets with talk

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Comments from ECB Chair Mario Draghi gave asset prices a welcome boost yesterday with the euro rallying, equities higher and peripheral bonds coming back from recent extreme levels. The speech sounded like a warning to the markets that he, and the resolve of the ECB should not be tested.

He commented that the “within our mandate, the ECB is ready to do whatever it takes to protect the euro”. He also stated that “if government borrowing premia hurts monetary policy transmission, then that is in their mandate.” Draghi is basically warming up to re-announce a bond-buying program for peripheral debt much like it took part in last year in an attempt to quell Italian yields.

The announcement is a strange one for a couple of reasons. Firstly, he and the market know that the inability for the ECB to follow through on this threat will be more damaging to asset prices than if it had never been announced. He must have the backing of the Bundesbank to have felt comfortable to do so. The fact that Angela Merkel is on holiday at the moment has got the conspiracy theorists twitching but we think that this is mere coincidence. That being said, the timing of it is odd.

Euro put on the best part of 2 cents versus the USD and a cent against GBP in the aftermath of the speech and with ECB, Bank of England and Fed events next week the expectations of further policy intervention by the world’s central banks should see this slight rally extend as long as nobody from the German side of things opens their mouth to issue a torrent of “nein”.

GBP-USD was also swept higher in the torrent of optimism following Draghi’s comments and is back knocking on the door of 1.57. It seems that 1.55 is now a decent level of support for the cross and we hope to see it push on from here. It is obviously correlated with EUR-USD and should see further legs higher on increased optimism or intervention expectations.

The data release of note today is US GDP for Q2. The spread on expectations is fairly wide (0.7% to 1.9%) and it will be nowhere near as poor as the UK’s number for example. US GDP has been slipping since the beginning of the year and a weak figure, which we would say as anywhere below 1.3%, would see further USD weakness as traders drag forward QE expectations.

The markets do seem quiet this morning, maybe everybody is finally on holiday, and there is little out there to move things pre-US GDP.

Have a great weekend and enjoy the Olympic opening ceremony!

Indicative Rates Sell Buy
GBPEUR 1.2749 1.2779
GBPUSD 1.5670 1.5838
EURUSD 1.2274 1.2297
GBPJPY 122.63 122.90
GBPAUD 1.5022 1.5049
GBPNZD 1.9514 1.9542
GBPCAD 1.5809 1.5840
NZDUSD 0.8018 0.8038
GBPZAR 12.88 12.93
USDZAR 8.2173 8.2529
GBPPLN 5.2628 5.2903
EURJPY 96.00 96.25

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