Volatility was back in force in the major money markets yesterday on the back of the important events were expecting to take place. Indeed we were not disappointed with the pickup in the volatility as traders looked to position themselves after the ECB meeting and the Retail Sales report. However it is interesting to mention here that both events even though they unfolded as expected were received in an unexpected manner from the market participants.
To go into more detail, starting with the Euro that suffered huge losses yesterday on the back of the ECB meeting on monetary policy and the press conference that followed. The central bank eft the policy unchanged but the ECB President Draghi was crystal clear in his comments after the meeting: they are not only considering but actively exploring all avenues to increase the stimulus to the troubled Euro area.
As a result the Euro dropped but the surprising part was the extent of the drop that took the Single currency from the 1.1300+ area to trade below the 1.1100 level by the end of the day. It is clear to us that market participants were not positioned overly short on the currency before the event otherwise the drop wouldn’t have been so massive. Further weakness should be expected moving forward as the 1.1000 area is now the next target.
The Cable was also active yesterday in light of the Retail Sales report which printed even better than expected. However the surprise was that even though the report revealed a clear uptick in consumer demand the Pound failed to benefit from it and the 1.5500 resistance held strong limiting any gains to the upside.
To the contrary the Cable lost ground by the end of the day and traded even below the 1.5400 support area when traders realized that the 1.5500 ceiling is not getting penetrated this time either. Fundamentally the Cable still has strong support and could look to retest the 1.5500 at some point but for the short-term the pair looks weak and could retreat towards the 1.5300 area after yet another unsuccessful attempt to break into higher ground.
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