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Market Analysis

Fundamental Analysis: Euro Spikes on Higher TLTRO Rates

June 06, 2019
BY Michael Stark

The euro made a strong temporary gain this afternoon GMT against most currencies in the aftermath of the ECB’s decision on rates. Probably the main driver was the announcement of higher rates for TLTROs. However, Mario Draghi was fairly negative in the subsequent press conference. Forecasts were in general quite mixed, with both upward and downward modifications.

Euro-dollar reached a peak above $1.13, a high of about six weeks. However, price retreated from this area of strong resistance quite quickly to around $1.125. EURJPY and EURGBP were basically similar at ¥121.80 and 88.6 pence at the time of writing. In every case, volatility has been exceptionally high.

Tightening conditions for refinancing

The most important news from the European Central Bank’s meeting today was higher rates for refinancing. Rates for the latest round of targeted longer-term refinancing operations (TLTRO III) will be 10 basis points or 0.1% higher.

While the full impact of the decision still needs to be analyzed, in the short term it’s basically positive for the euro. TLTROs essentially function as a mechanism for easing private credit conditions. Rising rates indicate a more positive outlook at the ECB in this area. For more information and context on TLTROs, see the ECB’s website.

Downside risks still in view for the euro

Despite this positive, it was difficult for traders to find much other good news from the ECB this afternoon. The key interest rate stayed at 0.0% as universally expected. What’s more, the bank’s president Mario Draghi renewed the promise not to raise this rate until next summer at the earliest.

Dr Draghi also stressed the ECB’s preparedness to take any action necessary against risks, which ‘remain tilted to the downside’. Such measures could include more quantitative easing. On the other hand, conditions look good for inflation hitting the ECB’s goal over the medium term. The rate is likely to be 1.3% this year according to the bank, a slight upward revision of 0.1%.

Upward and downward revisions of outlooks

Turning to growth, the picture is mixed. Comments covered a balance between rising headwinds from protectionism, vulnerability in emerging markets, and so on, but better employment and wages. Dr Draghi highlighted that growth is still expected to be fairly weak in Q2 and Q3 due to many of the same vulnerabilities hitting manufacturing.

Conversely, the ECB noted that there’s been an improvement in services and construction. The expectation for eurozone GDP growth is now up 0.1% for this year, but down 0.2% for the next and down 0.1% for 2021.

Time needed to digest, but watch tomorrow’s data

The wide variety of different factors highlighted by the ECB that pull in different directions has brought very high volatility. This seems to be likely to continue as traders continue to analyze the importance of risks in each direction.

There’s not much time to take a breath, though: tomorrow is NFP day. American job data is almost certain to bring more volatility for forex markets in general and euro-dollar in particular. Canada also releases a range of figures on employment tomorrow at 12.30 GMT.

The final key release tomorrow is Germany’s trade balance at 06.00 GMT. Although this is obviously less important than the NFP, it could be somewhat negative for the euro. The consensus indicates a decline of about €1.5 billion.

Euro set for more instability

The most likely scenario for the euro into the end of the week is high volatility with no clear direction. Although it’s possible that prices could move down towards pre-ECB areas, this is depends a great deal on tomorrow’s releases.

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