Leave it all to Mario?

By Brenda Kelly, head analyst at London Capital Group

You might almost feel sorry for Mario Draghi. The man must have the patience of a saint.

First of all, he had to undo the damage done by his predecessor, who in his infinite wisdom allowed the surge in oil prices coupled with elevated inflation expectations to rule his decision to hike interest rates at a time when the Eurozone was on the cusp of disaster. He then had to come to the rescue of the euro currency as bond yields spiked and the single currency had a fit of malaise at the height of the crisis.

For a man who has a very basic and inflexible mandate as head of the ECB, you have to give him some credit.

Numerous pleas in the past for governments to work together and find some fiscal solution have for the most part fallen on deaf ears. The most put-upon member states, with the notable exception of Greece, have seen borrowing costs tumble in the wake of his prior actions and words, but have failed to really capitalise under the heavy yoke of austerity.

We now face a fairly unsettling period.

Inflation levels below zero, the immigration stand-off and potential suspension of the Schengen Agreement, the political uncertainty in Greece, Spain and indeed the poster boy for austerity, Ireland, are all issues that should concern the central bank. Greece, a country that is basically bankrupt, is having to cope with thousands of refugees coming to its shores from Turkey, taking on the responsibility that should really be shared by other member states.

The near term Brexit referendum, the diminished state of eligible assets to purchase and ramped up fears that additional cuts to an already negative deposit rate will hurt European banks just adds to the man’s dilemma.

Despite his recent dovishness, the strength of the euro as result of upheaval in global financial markets does little to aid the case for price stability.

Even with a contraction in the industrial sector and a weaker-than-expected reading in Italy, the euro-area economy managed to grow by 0.3% quarter-on-quarter in the final three months of 2015 for a second consecutive period. Government spending probably contributed to the expansion to some degree while net exports, owing to the strong euro and slowing global demand, likely weighed on the headline figure.

Euro not playing ball

The European Central Bank is definitely poised to announce more monetary stimulus in March but nobody appears to have told this to the euro, which continues to hold above $1.08 and could even push towards 1.10/11 should the dollar weaken further in the face of poorer economic data. Against the pound, the move is even more bullish with separate drivers pushing sterling lower.

Now, the ECB will insist that it does not target FX rates but the strong euro certainly isn’t playing ball with its aims.

Ideally, we need to see another rate hike from the Federal Reserve to really push the euro lower and last Friday’s NFP data was mixed, with a great headline number but weaker wage growth. The market isn’t really pricing-in any further tightening until September.

Draghi will likely add a further deposit cut next week in spite of the perceived effects on Europe’s banking sector profitability - another thorn in his side. He may well hold off on doing much else, however. Core inflation is a concern but we may well see some base effects creep-in over the near term should oil prices continue to rise.

As for EURUSD? Well, it’s stuck between a rock and a hard place and for now will continue to trade range-bound until we get some clarity.

Next resistances lie at 1.0980, 1.1100, 1.1200.

Next supports at 1.0915, 1.0810.