Friday, February 7, 2014

The secret strategy of ECB

It was rather surprising that the ECB didn't sound as dovish as was expected due to the recent underperformance of inflation in the Eurozone. Mario Draghi pointed out that the situation is complicated and that the Eurozone is not threatened by deflation. I personally beg to differ but the actual question is why did the ECB decide against dovish rhetoric? They had to know that the euro would strengthen if they didn't sound dovish. They also know that weaker euro would support the economy of the Eurozone. This leads me to think that in ECB's mind there are much bigger threats currently out there than the threat of deflation. Another possibility is that dovish rhetoric might suggest a dim outlook for the Eurozone which would increase periphery rates again which would eventually lead to activation of OMT and a bigger mess than we are in currently economically. Whatever the reasoning might be I'm confident that Draghi has currently everything under control and they do have other measures available to hold the euro under control (reserves management of NCB-s for example).

This leads me to believe that the euro will be well supported right now and will be much more influenced by the dollar near term. I also believe that the possible upside in the euro is limited and I'm building my shorts in the area of 1.363-1.365.

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