By Gaurav Kashyap, Head of DGCX Desk at Alpari ME DMCC
The ECB convened on Thursday to announce that the main refinancing rate across the Eurozone would remain unchanged at 0.75%. But with markets expected rates to remain on hold, the attention was more centered on Draghi and his ensuing press conference.
Markets focus on ECB President's comments
Throughout the week, anticipation had been sky high that the ECB President would announce a detailed plan for easing monetary policy in the Eurozone, particularly following his bold comments in London the week before. So rife were expectations that within five minutes of the President taking the stage to begin his press conference, EURUSD popped up more than 200 pips to hit a twenty day high at 1.2405.
However Draghi disappointed and failed to deliver anything new and instead put the onus on European governments to push ahead with fiscal consolidation - and approve the ECB's proposed intervention in bond markets. The comments hinted that Germany was still not onboard, particularly when earlier in the week the Bundesbank warned that the ECB should remain within its mandate which prevents the ECB from refinancing sovereign debt.
However Draghi left the door open for the EFSF/ESM to intervene in sovereign bond markets but did not confirm any action or dates and instead, left the markets with more promises for the future. The lack of concrete measures saw the Euro whipsaw from 1.2400 levels back down to sub 1.2200 levels in a volatile thirty minutes of trading and the markets remained in the red until the release of Friday's US Nonfarm payrolls report.
Positive reaction to US jobs data
Friday's US Nonfarm payrolls slammed expectations and came in at a sparkling 160K new jobs added, as compared to expectations of 100K new jobs. June's figure was revised lower to 64K from 80K previously.
The unemployment rate was slightly higher at 8.3%, but the markets digested the news positively as the reading was the highest in four months, and well above the average of 75K new jobs added each month during the second quarter. Equities gained strongly on Friday following the report, and currencies reversed their earlier losses against the US Dollar to close the week on a positive note.
The Euro particularly found strength from a combination of the stronger jobs report as well as decreasing bond yields across the Eurozone periphery on Friday. In another boost of confidence to European markets, reports out of Germany on Friday suggested that members of Merkel's coalition government would be ready to support Draghi's bond buying program - a stark contrast from the country's central bank from earlier in the week.
Bank of England, FOMC hold rates
Also announcing their rates this week were the Bank of England and the FOMC both of whom kept rates unchanged at 0.50% and 0.25% respectively. With the BOE expected to remain on the sidelines this month after boosting their asset purchase target by £50bn to a revised £375bn last month, the rate decision out of the UK was a non-event and the British Pound instead moved on shifting risk sentiments; initially finding weakness from Draghi's lack of action, and then recovering on an improved jobs report.
Across the pond, many viewed this month's FOMC meeting has a potential forum for the Fed to highlight their plans on future easing for the US economy. However like the ECB, the Fed continued to maintain the status quo and instead shifted the responsibility to the US Congress to manage a spiraling government deficit.
The lack of action from the Fed boosted the US Dollar prospects on the day. Following the FOMC's statement, several believed that improving US data would continue to benefit the Dollar (improving US data would reduce the need for additional measures) however this theory was proved wrong judging by the markets response to Friday's NFP number.
Global growth continues to deteriorate
And finally, the global growth story continued to show signs of deterioration highlighting by weaker manufacturing readings across the globe - PMI activity from China slowed to 50.1 (Exp 50.5, Prev 50.2), while manufacturing activity slowed across the Eurozone: German PMI and Eurozone PMI were both lower at 43.0 (Exp 43.3, Prev 43.3) and 44.0 (Exp 44.1, Prev 44.1) respectively. UK PMI also was weaker, 45.4 (Exp 48.4, Prev 48.4) and the US index for ISM manufacturing slowed to 49.8 (Exp 50.2, Prev 49.7).
Looking at the week ahead, attention will turn to China, who are set to announce a slew of key economic figures including industrial production, inflation data as well as trade data. As noted a couple of weeks ago, the recent Chinese measures to combat slowing growth are having a positive impact on growth figures for the world's second largest economy - and if this trend continues risk sentiments will remain high in the week ahead.