ECB press conference

Mario Draghi, the President of the European Central Bank (ECB) delivered his speech yesterday. Given his history of press conferences, Draghi has been known to shake the markets in the most haphazard way.

Firstly, the interest rates as expected were lowered by 10 basis points for main refinancing operations, 35 basis points for marginal lending facility and another 10 basis points for deposit rates. For the first time here, deposit rates are negative.The EUR/USD rate pre-speech was around 1.3660, taking into account the effect of interest rate parity, a drop of deposit rates of -0.1% would have resulted in the rate to consolidate to 1.3646 (1.3660 x 0.999 ), all else equal. The graph shows the the lowest point during the speech at 1.3658. The difference of 12 pips is due to investor sentiment and as proven here, interest rate parity is a concept that holds.

Moving on, there were other policies to strengthen the Eurozone economy namely the targeted longer-term refinancing operation (TLTRO). The TLTROs will mature in September 2018, in around 4 years. TLTROs are used to provide liquidity to the financial sector. The positive impact of this action is to increase the confidence in the Eurozone. An action like this would cause the EUR/USD rate to go up.

As quoted in the speech, "... to maintain a high degree of monetary accommodation, as well as to contain volatility in money markets, we decided to continue conducting MROs as fixed rate tender procedures with full allotment for as long as necessary....". Unlike TLTROs, MROs which stand for main refinancing operations mature in one week. This step by the ECB would impact the currency markets by reducing the volatility of the Euro. New traders could choose to trade Euro pairs as the risk is lower.

Real GDP in the Euro area rose by 0.2%, where the annual increase of the real GDP by 1% is foreseeable. Compared to the press conference in March, the extrapolated real GDP growth for 2014 has been revised downwards while the estimate for 2015 has been revised upwards. 

Without going into the details of monetary analysis of M1, M3 and M3 a decline of the demand for Euro can be seen.

Experts would say buy the rumour and sell the fact and time in time the trend repeats itself. After hitting an all day low of 1.3503, EUR/USD rose to 1.3670.

The full speech and the question and answer section can be found from the ECB website.

I made close to a 60 pip gain by shorting EUR/USD slightly before the speech and exited after a few minutes. I would have went in long after that but I did not have a decent internet connection last night to watch the news live had I known the full content of it.