Mario Draghi: The Impact On The Euro

Includes: ERO, EU, FXE
by: Vinayak Maheswaran

The euro has been on a bumpy ride the last few months, sort of like the Japanese Yen. A lot of the stuff that I am about to discuss here is extremely relevant to forex traders that focus on the major currency pairs like the EUR/USD and the EUR/JPY, even though it will be about one man and his impact on a currency.

Euro Minimum Bid Rate Announcement

Before we go any further, I want to point out why you should continue reading this article. There is a big event at 12:45PM GMT today (Thursday) and it concerns the Bid Rate decision. This will then be outshone by the European Central Bank (ECB) Press Conference that will take place 45 minutes later. Speculators will be hanging on to every remark that ECB President Mario Draghi makes as history has proved him to be a big mover and shaker of the financial markets. And especially the euro.

Past Performance: A Guarantee of Future Results?

Fundamental analysts should note that Draghi's comments are of high value and impact the markets greatly like they did in the first week of February 2013. Draghi spoke then at the ECB Press Conference with a warning note about the euro that was soaring at the time. The comments were enough to send the euro tumbling within minutes.

Source: MarketPulse FX

Draghi has proved time and again the power of his words. Ten days after the ECB Press Conference, Draghi made some hawkish remarks about the high exchange rate to the monetary committee of the European Parliament and we had some more volatility in the EUR/USD. This time it surged upwards and the positive German and eurozone ZEW surveys were additional factors too in this outcome.

Source: MarketPulse FX

Draghi was basically more satisfied with ECB efforts to monitor money market movements and his hawkish demeanor gave currency traders enough impetus to buy more of the eurozone currency.

Mario Draghi - The Euro Savior?

Everyone expected 'Super Mario' to be the one who would save the euro when he got the ECB top job. Italians are renowned for their inflationary policies, but we have Draghi here who is known for his "international mentality". Readers should note that it was Draghi who was among the many individuals who pushed for the euro and worked towards making it the currency of the EU.

Draghi is definitely vested in the success of this one of a kind currency that is paramount to the success of the EU. It will be interesting to see what this MIT grad and Goldman Sachs alum has in store for the second most traded currency on the planet.

How to trade the euro and euro related currency pairs

I guess it's pretty elementary now that I've shown you all this. But I'll make things crystal clear for you anyway. Draghi's words have carried so much weight in the eurozone that when he recently spoke at the Spanish Congress, the Wi-Fi signals and frequency inhibitors were cut so that the public could be kept in the dark for a while.

It is with this backdrop that investors will look to place positions on euro and euro-related currency pairs after the ECB press conference tomorrow. If the rate actually changes, then there will be considerable volatility and speculators should wait a bit before entering into trades. If the rate goes up, then the euro will rise and if the rate falls, the euro will as well.

However, the rate should remain the same according to market analysts and so it will be Draghi that traders will have to watch. If Draghi's attitude and remarks are hawkish, the euro will soar. Conversely, it will decline if Draghi appears dovish.

Technically Speaking

I wanted to share a long-term chart that shows the euro exhibiting ranging behavior.

Source: Yahoo Finance

The EUR/USD has definitely been trading in a tight range since the highs of 2008 from which it dropped off after soaring for a good part of 6 years. The euro is in a long-term downtrend and everything points to a further decline in the eurozone currency.

Bottom line: A weaker euro is good for the eurozone

I have maintained a pretty bullish sentiment so far, but this time I expect a bearish correction in the EUR/USD. There could very well be an interest rate cut Thursday. As it is, the U.S. economy is showing significant strength with U.S. Non-Farm Employment expected to add 158,000 jobs. The euro should decline and go below $1.2950.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.