Talking Forex: EUR/USD Pair Failed To Hold Earlier Gains

EUR/USD

The pair failed to hold onto earlier gains and settled the session little changed after EUR came broad based selling pressure as market participants digested more aggressive wording by Draghi on accommodative policy, after Draghi stated that the ECB strengthened wording of forward guidance. This also resulted in the Euribor curve bull flattening and the EONIA 1y1y rate coming off earlier levels. On the topic of money market rates, Draghi said that it is difficult to link EONIA to excess liquidity. ECB's Draghi also said that there are two contingencies that could lead us to act, adding that the governing council discussed all possible instruments and discussion continues. However he also warned that it is pointless to speculate which instrument the ECB would use.

As a guide, the price action earlier in the session was driven by unwind of dovish EUR positions amid positive sentiment stemming from solid demand for Portuguese 5y bond syndication. The sentiment was also supported by aggressive SP/GE 10y spread tightening after the Spanish Treasury sold EUR 5.29bln worth of bonds vs. Exp. EUR 4-5bln.

GBP/USD

Despite the broad based EUR weakness in the second half of the session following the press conference by Draghi saw the USD index move back into positive territory, consequent move lower by the EUR/GBP ensured that any selling pressure on the pair was largely offset and thus ensured that GBP/USD settled little changed.

In terms of UK related macroeconomic commentary, according to the ONS, the gap between imports and exports of goods shrank in November, as exports were boosted by higher sales to recovering economies in the European Union. Also, imports from the EU increased by GBP 0.5bln to GBP 19.2bln, a record high attributed mainly to cars.

USD/JPY

Broad based EUR weakness in the second of the session which ensured after Draghi reaffirmed commitment to forward guidance and in turn resulted in aggressive pairing of initial gains by the EUR/JPY was offset by consequent USD strength and thus ensured that the pair finished near the unchanged mark. In terms of Japan specific commentary, BoJ board member Shirai said it is possible to aim for 2% inflation at a slower pace than 2-year time frame and that currently there is a lot of uncertainty surrounding the time frame for the BoJ's inflation target.