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Watch Out Euro Bulls, Draghi Is Watching You

Monday, 6 May 2013 | 11:04 PM ET
ECB President Mario Draghi
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ECB President Mario Draghi

European Central Bank (ECB) chief Mario Draghi's latest comments that further monetary easing in the euro area is possible is making euro bulls think twice, say currency analysts.

The ECB chief departed from a prepared speech in Rome late on Monday to say that the central bank would watch data closely and be prepared to cut interest rates further, including the deposit rate at zero, on further signs of economic weakness.

The prospect of deposit rates in the euro area moving into negative territory pushed the euro down about 0.5 percent to a low of $1.3052 overnight and the currency was not too far off those levels in early Asia trade Tuesday.

"The prospects of negative deposit rates in particular will continue to send shivers down the spines of euro bulls," analysts at Credit Agricole said in a research note, adding that they expected any euro gains to be capped around $1.3168.

(Read More: ECB's Coeure Says Rates Can Go Even Lower)

The ECB cut its key rate by 25 basis points last week to 0.5 percent and at the central bank's news conference, Draghi said the central bank was ready for negative deposit rates.

While the euro fell last week on those comments it bounced back after ECB Governing Council Member Ewald Nowotny told CNBC on Friday that markets had over-interpreted what Draghi had said.

(Read More: ECB's Nowotny: Markets 'Clearly' Over-Interpreted Talk of Negative Rates)

According to currency analysts, the latest remarks from Draghi are an attempt to put the record straight and perhaps take the shine off the strong euro, which is hurting euro zone exporters.

"There's no doubt that he [Draghi] was keen to take out some of the bounce in the euro that happened on the CNBC interview with Nowotny a few days ago," said Sean Callow, senior currency strategist at Westpac Bank in Sydney.

"He wants to get the message out very clear that yes they [the ECB policy makers] are considering negative interest rates, which would be a big negative for the euro. So it is worth trying to knock the euro down a bit," Callow said on CNBC Asia's "Squawk Box."

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Currency strategists add that inflows of foreign cash into peripheral euro zone government bond markets after several months of relative calm and stability means the euro still faces pressure to rise.

"You've seen gains in euro peripheral bond markets, there is money coming into the euro zone and you can't be too upset about that," said Callow.

(Read More: Why the ECB Is 'Stupid' Europe's Best Hope)

Axel Merk, president and chief investor at Merk Investments, said that because heavy monetary stimulus in the U.S. and Japan meant weakness in the dollar and yen, the euro was still likely to rise against these major currencies.

"Draghi is going to have a very hard time talking down the euro," he said. "They [the ECB] are mopping up liquidity in the euro zone, while the U.S. is printing money at a record pace, so is Japan."

Then again, traders know when to take the ECB chief seriously. After all, say analysts, it was Draghi's comments last July to do "whatever it takes" to protect the euro zone from collapse amid heightened concerns about a debt crisis in Spain that helped calm markets and push the single currency off two-year lows versus the dollar.

And this time around too Draghi is expected come good on his word .