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Draghi saves the day again

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The European Central Bank did not change its monetary policy today, as expected. On the other hand we had a verbal intervention from Draghi, which led to massive sell-off of the European currency. Draghi stressed a risk of downside, which was also reflected in weaker GDP and inflation projections. By increasing the limit of percentage of a given bond issue that the ECB can buy from 25 to 33% the Bank also created an impression that it was preparing for extension of the program even as Draghi assured there was no discussion on extending the program today. As a result the euro suffered, declining 0,8% against the US dollar and over 1,2% against the Japanese yen, that was the strongest G10 currency today. The euro sell-off was visible for example on EURGBP currency pair. On the other hand we have seen a big rally on European stock indices with DAX rising by 3% at peak.

We had also important data from the US, especially the non-manufacturing ISM that came out lower than in July but above expectations. While employment sub-index declined, it was still at a solid 56, which should secure a decent NFP reading tomorrow. This reading is by far the most relevant thing remaining in the calendar this week and it may have a large impact on the US dollar, 2 weeks ahead of the FOMC meeting.

Asian markets had a relatively quiet day after the volatility of recent weeks, as China kicked off a two-day holiday to commemorate the end of World War Two. However, the AUD is still the one of the weakest currencies on the FX. Retail sales in Australia declined by 0.1%, missing the median market forecast for an increase of 0.4%. In June sales increased by 0.6%, revised down from 0.7% reported previously. It was the largest monthly decline in percentage terms since May 2014, and left the annual increase after seasonal adjustments at 4.2%, the lowest level since April.

The Swedish Krona advanced after Sweden’s central bank retained its benchmark rates as the benefits of the expansionary monetary policy is working through the economy. The Executive Board of the Riksbank decided to hold the repo rate at -0.35% as expected by economists. The bank last lowered the rate in July, when it cut the rate from -0.25%. The repo rate is expected to be at the current level for about one year, while the repo-rate path reflects the possibility of lowering the rate further.

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