FTG Blog - Euro Declines as Draghi Sees No Need for ECB to Change Course

Euro Declines as Draghi Sees No Need for ECB to Change Course

The euro dropped to the lowest since mid-March as dovish remarks from Mario Draghi and option hedging before the French elections weighed on the currency. The shared currency slid as the European Central Bank president said that a pick-up in inflation across the euro area isn’t yet strong enough and that “a reassessment of the current monetary policy stance is not warranted at this stage.” These comments, which push back against recent speculation about ECB tightening and calls from German banks to scale back bond purchases, led to fresh selling interest by interbank and leveraged accounts.

Macro investors also helped to clear bidding interest above $1.0635, foreign-exchange traders in Europe and Asia said. The common currency pared losses versus the greenback as cross action supported.

“Most of Draghi’s comments may already be in the euro price after last week’s correction but a realization of a cautious ECB could be the final hit to lingering euro bulls ahead of the April ECB meeting,” according to Viraj Patel, a London-based foreign-exchange strategist at ING Groep NV.

The euro was initially higher for the day and it could have moved above offers near $1.0700 had it not been capped by sellers through options, according to the traders, who asked not to be identified as they weren’t authorized to speak publicly. The one-month tenor in option structures captured the second round of the French presidential elections for the first time and fresh hedging coupled with rolling over of low-delta euro puts has also pressured the currency.

Hedging interest had been mainly manifested versus the yen, where risk reversals nosedived to the most euro-bearish sentiment since June. Implied volatility in euro-yen rose above 15 percent, the highest in eight months. The premium for Euro-Swiss franc puts over calls stood at 2.48 percentage points, up from 1.27 percentage points Wednesday; this move marked the most bearish euro sentiment on the cross since June.