On a day where traders are showing some caution ahead of a highly-anticipated European Central Bank (ECB) rate decision – and perhaps still in shock following a complete twist in commitment from the Swiss National Bank (SNB) – increased demand for safe-havens are being noticed with Gold rallying to around a 5-month high ($1293) a few hours ago. Since the SNB unexpectedly removed the minimum exchange rate to the Euro last Thursday, increased demand for safe-havens such as Gold are being noticed, with this perhaps being linked to traders seeking a flight to safety, with the financial markets being highly volatile right now. It is also possible that Gold bulls could be exploiting a reduced flow of high-risk economic data to be released from the United States this week, pushing the price higher as a consequence.
Despite the German ZEW survey unexpectedly jumping to an 11-month high earlier on, there was reluctance to purchase the Euro and I think that says a lot in regards to the overwhelming majority expecting QE to be finally introduced from the ECB this week. You would also normally expect pressure on stocks following an economic downgrade from the IMF, however European equities are continuing to rally to the upside, which is not at all linked to increased optimism in the European recovery, but increased hopes that Draghi will push the QE button. The pressure on Draghi to introduce QE is intense and if he doesn’t deliver what stocks bulls have been pricing in, European stocks could be at high risk to losses on Thursday. How low the Euro could possibly go would also be dependent on how much QE is actually purchased from the ECB.
Attention continues to be directed on the Denmark Central Bank, with the national bank cutting its deposit rate and reaffirming its commitment to the Euro peg only yesterday. Although the example set from the SNB last week shows that any central bank discontinuing any minimum exchange rate can no longer be ruled out of the equation, it makes sense for Denmark to continue its minimum exchange rate for the time being. The reason for this is mostly because the Norwegian Krone has suffered weakness following the unexpected decline in oil clouding its economic future, and the Swedish currency is also suffering weakness while the Swedish economy combats a deflation battle. With its nearby areas suffering economic weakness, it makes sense to maintain a weak Danish currency as well and I think raising negative rates helps achieve this.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
Follow Jameel on Twitter @Jameel_FXTM
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Source:: Traders continue to rush for Gold