Currency Watch: Draghi in a hawkish mood

The European Central Bank’s meeting was the market’s focus this week with the single currency initially strengthening as its president, Mario Draghi, spoke before falling back once he had left the stage.

The ECB president’s tone was a lot more hawkish than the market expected with the euro benefiting from the assertion that further monetary policy weakening was not on the cards anytime soon via extra money for banks or an interest rate cut.

He was quick to emphasise that Q1’s economic indicators were consistent with stabilisation in Europe, it is unfortunate however that figures so far for Q2 have suggested anything but.

If the economic data continues along this path, the pressure on the ECB will only increase and we think a form of QE that keeps yields on peripheral bonds below a certain level would be a goer in this circumstance.

This would see the ECB continue to buy the bonds of the countries whose yields are over a certain level in order to bring them back down to more manageable levels.

Draghi also pleaded for “perseverance” from Europe; a not entirely well-veiled reminder that Germany and the Bundesbank will not stand for people shirking their austerity responsibilities.

This is all after we added another country to the list of western nations that have fallen back into recession following Spain’s preliminary reading of -0.3% for 1st quarter GDP.

The combination of austerity and an unemployment rate of close on one in four people of working age will do that to your country, and with green shoots still well underground the situation is not improving any time soon.

There was not too much of a calamitous fall for the euro however, as the -0.3% reading was actually better than the market had expected.

After it was all said and done however, the euro is very much in the same place as it was this time yesterday against the majors with the latest round of event risk coming from the elections in Greece and France this weekend.

We have seen some tightening in the tracking polls between Hollande and Sarkozy as we’ve got closer to the election although this always happens and we, and the market, still expect a victory for the socialist candidate Francois Hollande.

We would expect to see people come out of risky positions come the end of trade today ahead of the election with concerns about how the Greek election could hurt the Monday open.

Even so, the market will want to get today’s Non-Farm Payrolls announcement out of the way. Expectations have dropped from around 180,000 jobs added in April to 160,000 now following Wednesday’s poor ADP reading.

Yesterday’s initial jobless claims may have gone someway to keeping expectations up as we saw a 27,000 drop in the number of people claiming jobless benefits. That being said there is the possibility for a serious surprise either way of the 160,000 consensus with a beat likely to strengthen dollar and vice versa.

Jeremy Cook is chief economist at World First foreign exchange