There was an ECB meeting on Thursday, and there was no change in policy, but the Euro plunged nonetheless, right in the middle of Mario Draghi’s press conference, which started at 8:30 AM ET.
You can see how nasty it was for the Euro this week on this chart from FinViz:
So what was the news that Draghi made?
It was simple:
He strongly hinted at a dovish bias in his outlook, meaning the ECB would have a predisposition to cut rates. The next day, the ECB’s Jozef Makuch also hinted at a rate cut.
So why is this all good news? Because it means the Euro is behaving like a normal currency again.
Normally, you expect currencies to fall when central banks cut rates (because you get paid less for holding that currency) and you expect currencies to rise when rates go up. But the Euro had gone into backwards mode (kind of) whereby dovish actions from the ECB were seen as Euro-bullish because they enhanced Euro stability. And hawkish actions were seen as Euro-negative, because the worsened tensions, and promoted Euro fragility.
Thus the crucial observation from this week (and it’s one that was pointed out on twitter by @ivanthek) is that the Euro has gone back to being a normal currency, responding in the predictable way from central bank noises. It’s a further sign that Chapter 1 of the crisis is over.
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