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Deutsche Bank Fears and Draghi Comments Sink Euro (EUR) Forecast

September 27, 2016 - Written by John Cameron

Shares in leading German retail bank Deutsche Bank AG (DBK.DE) sank by almost 7% during yesterday’s session as rumours swept the market about the state of the venerable lender’s balance sheet. The plunge took Deutsche Bank’s share price to its lowest level since 1985 and prompted questions to European Central Bank President Mario Draghi regarding his bank’s willingness to stage a bail-out, if required.

Speaking at the European Union parliament in Brussels, Draghi told the assembled lawmakers that he would not comment about the operations of individual companies. However, market whispers regarding Deutsche’s ability to pay the whopping $14 bn fine which US authorities imposed on it earlier this month for mis-selling mortgages failed to abate.

EUR/GBP Exchange Rate Just Falls Short of Three-Year High



The Euro (currency : EUR) performed well on the day against the Pound Sterling (currency : GBP) in the lead-up to Draghi’s comments, sending the Pound Euro exchange rate down to within a whisker of its lowest level since the Summer of July 2013. The pair bottomed out at 1.1477 during the middle part of the European equities session but, not for the first time, comments from Draghi saw the shared currency weaken.

Draghi re-iterated a theme which is fast becoming prevalent amongst global central bankers, suggesting that there was not a lot of monetary policy ammunition left in the tank and calling for politicians to weigh-in with fiscal policy. The Italian moneyman told the European parliament that,

‘The political commitment underpinning our single currency has been strongly reaffirmed during the crisis. Important efforts have been made.’


Before going on to assert that,

‘But widespread feelings of insecurity, including economic insecurity, remain a major concern. We cannot simply wait for better times: we need to renew our efforts to ensure that Economic and Monetary Union offers protection and prosperity. The ECB will do its part.’

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Euro Could Record Gains if Markets Interpret Draghi's Comments as Suggesting an End to ECB Easing



Turning to the structural effect of sub-zero interest rates in the Euroland, Draghi noted that,

‘Low rates are a symptom of the underlying economic situation. They reflect weak long-term growth trends and the protracted macroeconomic slump that has resulted from the crisis.
The ECB’s monetary policy has provided significant accommodation to limit the negative effects of the global and euro area-specific shocks on the economy, thereby mitigating their disinflationary impact.
Nevertheless, monetary policy cannot determine the sustainable level of real interest rates in the long run, as they in turn depend on long-term growth prospects.
This means that other policy actors need to do their part, pursuing fiscal and structural policies which will contribute to a self-sustaining recovery and increase the economic growth potential of the euro area, as I discussed with you in June.’


The tone of Draghi’s words led some investors and analysts to forecast that the ECB may now be finished with policy loosening and Europe’s recovery will now have to be driven by a ‘go for growth’ stance from Brussels. If they are right, then the Euro could record further near-term gains against the Pound and other major global tenders.

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