After a recent barrage of negative feedback from the Euro-region, European Central Bank President Mario Draghi inspired a significant bounce across global risk assets overnight. European equities rocketed higher and high-beta currencies record solid gains as Draghi vowed “to do whatever it takes to preserve the euro.” Speaking at an investment conference in London, Draghi reiterated the ECB’s commitment to save the union, pledging “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Despite a decidedly solid performance across global equities and risk currencies, it’s clear without near-term action or concrete plans, any bounce in sentiment represents little more than a short-term sugar hit. Markets are now in high expectancy mode, suggesting an imminent need for the ECB to provide a concise plan of attack which may involve further LTRO (Long Term Refinancing Operation) purchases and direct participation in sovereign debt markets. Nonetheless, peripheral debt markets have responded in kind to the prospect of increased ECB intervention with Spanish 10-year yields falling back below the ‘bailout zone’ of 7 percent overnight.
FX trends favoured high-beta currencies at the expense of safe havens the US dollar and Yen which took a solid hit against major counterparts. The Euro snapped its losing streak with initial moderate upside gaining momentum as Draghi’s comments hit the wires. This in-turn prompted a short squeeze, with the key inflection point triggering stop entry orders on the way up. The EURUSD pair rose to highs of 1.2330 throughout the session from levels around the 1.2135 mark before Draghi’s speech hit the wires.
Across the channel, sterling trajectory was slightly sharper after an early week slump with cable making a three big-figure leap over the session to session highs of 1.5725. Solid gains were also noted across the commodity bloc with the Kiwi outpacing the Aussie dollar while the CAD lagged behind. The Aussie dollar made a break through 104-figure to highs of 104.25 before consolidating gains just below the figure and current levels around the 103.9 US cent mark.
In the absence of local news this morning, the Aussie dollar will take direction from regional equities while the release of China’s leading index and Industrial profits for June may also induce some short-term noise. Apart from the constant stream of Euro-centric headlines guiding FX trends, market participants will turn to the U.S GDP release which will no doubt drive stimulus expectations. Recent weeks have seen growth concerns from the U.S lead to a notable shift in stimulus expectations, in turn providing intermittent headwinds for the U.S dollar. Constructing a view on how the U.S dollar will react to critical these evenings GDP has become a veritable minefield, with a mix of global sentiment and QE expectations intermittently shifting greenback demand, and by default its risk counterparts. Gross Domestic Product is expected to record annual growth of 1.4 percent from a previous 1.9 percent, while personal consumption data accompanying the release is expected to slide to 1.4 percent in the second quarter, from previous growth of 2.5 percent.