Stocks jump as Draghi steals show with dovish remarks

This week’s main central bank event may be not be happening until tomorrow when the Federal Reserve must decide whether to trim interest rates now or prepare the markets for a potential cut in July, but it was the European Central Bank’s Mario Draghi who stole the show this morning.

He gave one of the clearest signals yet that the ECB could loosen its belt to tackle faltering growth and prevent inflation expectations from falling further. Stock market participants loved it, and the German DAX index rallied in excess of 200 points from its lows in short order. The euro dropped, although by a lesser degree, with the EUR/USD exchange rate only dipping to 1.1180 before rebounding slightly.

Draghi was speaking at the ECB’s annual symposium in the Portugal this morning. He said that QE still “has considerable headroom,” adding that “if the crisis has shown anything, it is that we will use all the flexibility within our mandate to fulfil our mandate — and we will do so again to answer any challenges to price stability in the future.”

If the Fed also delivers a dovish outlook for interest rates tomorrow, the stock market rally could gather further momentum, while if they are surprisingly hawkish then watch out for a sharp U-turn.

But for now the DAX is looking healthy after it broke resistance in the 12130/5 area and has accelerated away from there, taking out in the process a short term corrective trend line. Thus, any short-term pullback to this 12130/5 area could now be supported. However a break back below today’s low either today or later in the week would nullify any bullish arguments.

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