Draghi did it again! So, what's next?

Draghi did it again! So, what's next?

still surprising that the market bought Draghi jawboning once again. He did it with the “whatever it takes” last year, and again this past Thursday when in the middle of the press conference, he said that the ECB is comfortable with taking action in June. That was enough to send the EUR nose diving against its rivals, as the market rushed to price in more stimulus next month, with the EUR/USD losing  over 200 pips by the end of the week after flirting with 1.4000 right after the Central Bank left its policy unchanged. 

Dollar strengthened furiously against its European rivals, but the question is now, is this strength sustainable in time? Not a done deal yet: FED’s head Janet Yellen remains quite dovish over the future of the US economic recovery; dollar index trades at multi-month lows, while US bond yields struggled to pull out of recent troughs.  But is also true that if the ECB cuts rates even further or introduce negative rates or another unconventional measures, the imbalance between rates will no doubts favor the greenback, and therefore wipe away any EUR strength. 

However, is still a bit early to consider the matter, as the EU Central Bank has yet to revise its inflation and growth forecast during upcoming June meeting: if the revision is to the downside, then action is discounted, but if inflation readings show signs of continuing picking up along with manufacturing data, a movement will be harder to justify. The EUR then may came back in full recovery and the ECB will have it hard to convince investors with just words. 

Anyway, we are a month away and in the meantime, every single European reading will be put under a microscope with the aims to anticipate ECB’s next step.

For the week ahead, attention will center in Germany, staring with ZEW surveys on Thursday, expected to show increased confidence in the EU. Inflation readings for the country will take center stage on Wednesday, while Thursday will bring GDP readings for several European economies including Germany, France and Italy. Finally, inflation in the EUwill be the critical reading of the week. All of this numbers will produce reactions according to how the ECB will move next month: positive readings will diminish chances of more stimulus and put the EUR back in the bullish track, while discouraging ones will suggest the Central Bank will have to act and therefore trigger further sells in the common currency.

As for the UK, main reading will be employment figures on Wednesday. There’s no need to say that despite Draghi’s driven slide in Pound, the currency remains among the strongest of the board. The UK economic growth is for now undisputed along with market conviction the country will lead the economic tightening. Better than expected numbers should trigger a strong recovery in Pound, even against weakened EUR, with GBP/USD approaching again to critical 1.7000 figure.