-Guy LeBas, the chief fixed-income strategist at Janney Montgomery Scott LLC
The decision to cut all three interest rates and expand its LTROs was supposed to push the single currency significantly lower, as central bank tries to combat higher Euro and weak inflation. Nevertheless, the single European currency soared almost a half per cent versus the greenback and 0.13% against the Japanese Yen. Some can call it a profit taking, as the EUR/USD pair hit a strong support at 1.3503. Nevertheless, Mario Draghi is facing a serious dilemma, similar to Fed's Chairman Greenspan experienced earlier. He was in trouble when he boosted interest rates only in order to lower bond yields. Draghi's actions are likely to boost the region's bond and stock markets, pushing their appeal, and the currency needed to buy both. Soon after the announcement, the periphery bond and equity markets rallied, contributing to a stronger Euro. Bloc's stock exchange-traded funds took around $800 million of assets during five days to June 3, following only $200 million in the prior period. Over the last four weeks these funds added $2.6 billion of assets. At the same time, German benchmark index topped 10,000 for the first time, while Italian two-year government bond yields plunged to a record-low of 0.594%.
Draghi's last week's announcement was the most dramatic since the summer of 2012, when he announced his intention to "do whatever it takes" to save the Euro. Following these words, the EUR/USD pair sank to 1.2043, while Italian yields stood above 5%.
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