The Euro has erased earlier gains to shed 0.5 percent against the US Dollar, as European Central Bank (ECB) President Mario Draghi cited the possibility of more economic stimulus for the Eurozone, which may include lowering interest rates further into negative territory.

Draghi’s comments appeared vigorously dovish and stand in high contrast to what he conveyed just earlier this month, that interest rates are expected to remain at present levels until at least mid-2020.

Central bankers talk up policy weapons amid looming downside risks

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Draghi is part of the parade of major central bankers, including the Fed, BOJ and PBOC, who have been parading the arsenal of policy weapons at their disposal that can be used to counter downside economic risks.

Perhaps more worrisome for Euro investors is the signalling effect of Draghi’s latest comments, suggesting that the Eurozone’s economic fundamentals are not as robust as expected and may require more policy aid after all.

Should global economic conditions deteriorate further and feature more prominently in the EU’s economic data, that may drastically lower the bar for an ECB rate cut. Even then, investors will be left to ponder whether sending interest rates into further negative territory would be the medicine that the EU economy requires.

Euro appears to have a path-of-less-resistance to the downside

With EURUSD now trading below the psychological 1.12 level and having wiped out most of its month-to-date gains, the currency pair has found a potentially easier path towards the downside as it tests the 1.11 support line over the immediate term. Limited relief for the Euro may come in the form of a Federal Reserve that makes a sudden and significant dovish pivot this week, which may allow the Euro to retrace its path back above the 1.12 mark.

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