By Kathy Lien. Investors sent EUR/USD to its highest level this month on the back of the European Central Bank’s monetary policy announcement. Considering that euro was trading strongly ahead of the rate decision, it didn’t take much for the currency pair to hit 1.17 and now that it has, many traders are wondering if they should fade or follow the move.
To answer this question, we need to dissect Super Mario’s latest outlook – judging from his comments, we know he’s worried about growth (hence the lowered GDP forecasts for 2018 and 2019), protectionism, emerging-market turmoil and external demand. Yet EUR/USD rallied because low inflation has become less of a concern. According to Mario Draghi, domestic cost pressures are strengthening and inflation should pick up toward the end of the year and rise gradually in the medium term. The central-bank Governor’s concerns about trade tensions are also tempered by his view that global demand is strong. Despite the GDP downgrades, a healthy labor market keeps their economic outlook broadly balanced.
Market sentiment and positioning is very important when it comes to trading major event risks. Had the euro been hovering near this month’s low ahead of the rate decision, traders would have latched on to the central bank’s lower economic projections. However, the possibility of a GDP downgrade was leaked on Wednesday, giving investors the opportunity to discount the central bank’s move. The recent decline in Italian bond yields also helped euro stabilize this week. So when the softer US consumer price Index was released, EUR/USD popped higher and extended its gains to 1.1700. Traders, who were looking for a reason to cover their shorts, focused on the positive elements of Draghi’s comments. They were happy that he had anything positive to say at all and relieved there was no mention of the data disappointments in Germany and Italy.
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