Why did Draghi Need to Act Now?

Why, Draghi, Need to, Act Now, Euro, fx trader, forex, Fundamental Analysis

26 Oct 2015

The obvious thought process on the back of more global stimulus is to just say "buy stocks and sell the Euro". Indeed, this is the likely outcome in the weeks ahead. However, we continue to believe that more of the same will have diminishing returns and that the unintended consequences or risk of running more extreme policies are becoming greater. We will set out below some market thoughts as well as some concerns.

Mario Draghi made some pretty big commitments. He said that the ECB was “willing and able to act by using all instruments available”. He confirmed that they would be able to cut the deposit rate further into negative territory. And although he does not target the exchange rate, we all know he has wanted a weaker Euro since May 2014, and his rhetoric and style tells us that he wants the Euro to weaken again.

The two obvious takeaways from Draghi’s comments is that European equities will go up (or at the least outperform) and the Euro will weaken. We have bought European equities and sold Euros versus the US Dollar post the ECB meeting.

The first chart below shows the Eurostoxx 50 index and we have drawn a line around the 3300 area which has acted as both resistance and support on a number of occasions. The break above 3300 last week would appear to be important and we expect more strength to come in the next few weeks at least.

Why, Draghi, Need to, Act Now, Euro, fx trader, forex, Fundamental Analysis chart