It looks like the European Central Bank is finally waking up to the fact that belligerence over further monetary policy easing is resulting in a firming in the currency.
The fact that EUR/USD came dangerously close to breaching the psychologically important level of 1.40 must have triggered some panic within the governing council. To counter this ECB President Draghi noted that the currency’s level is becoming “increasingly relevant in our assessment of price stability”.
The problem is that words alone will not do the trick. Draghi believes that enhanced forward guidance will help to loosen monetary conditions by lowering real interest rates and this will weaken the EUR as real rates fall relative to other countries.
The market will expect action and not only words. If the Draghi really wants to weaken the EUR some form of monetary measures will need to be announced otherwise there may be little to stop EUR/USD testing 1.40 and beyond.
In the near term Draghi may have helped cap EUR/USD although technical support around 1.3825 (28 Feb previous high) will limit any downside.