Small Step for Draghi, Giant Leap for EUR

The removal of one phrase from the ECB statement was a tiny move from Draghi but it was a shift to a new direction. The euro was the top performer Thursday while the yen lagged. Australian home loans are due next but the main focus will be on the National People's Congress in China and non-farm payrolls later.  

Draghi's introductory statement removed a pledge to use all the instruments available to meet its objectives. Removing it doesn't change anything; they will still use all tools if necessary. But, as Draghi later explained, it was removed to signal there is no longer urgency in taking further actions.

It wasn't as big of a step as some were expecting but the euro jumped to 1.0615 from 1.0550 on the change. One spot analysts were looking for a change was removing a pledge that rates could go lower if needed. That may be the next step but for now, the ECB decided to move slowly.

But the pace of change is less important that the direction. Today's press conference was a signal that the ECB believes they have reached the end of the easing cycle. Alone, that would be a sign of a bottom for the Eurozone economy. Whether it's a bottom for the euro will depend on how fast others move in the same direction.

Clues on how it will perform against the US dollar will come in the week ahead. Up first is non-farm payrolls but note how EUR/USD performed after ADP. The private jobs numbers in that report were sparkling and the correlation is high with NFP, yet after a momentary blip, the euro climbed higher and it remains 30 pips higher.

The euro has also been able to withstand a shift to a much more hawkish Fed with aggressive rate hikes priced in for this year. Non-farm payrolls could still be strong, wage growth could accelerate and the Fed could be upbeat but given that the euro has already withstood so much, it's tough to imagine it couldn't take a bit more.

The flipside is that it gained 65 pips easily on a small hint from Draghi. So if any part of the US jobs report or the FOMC disappoints, the euro may find gains to the upside much easier. Of course, if the recent lows below 1.05 and 1.0350 give way, we may have to reevaluate.

Before the jobs report, we will be looking to continued headlines from the National People's Congress. The economic calendar is generally light but the 0030 GMT release of Australian home loans could make ripples in the Australian dollar. The consensus is for a 1.0% decline.