Draghi disappoints Euro bulls as ECB fails to hint at policy change

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28 April 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Euro slipped against its major peers after the European Central Bank meeting on Thursday, in which rate-setters in the Eurozone kept policy unchanged, as expected.

T
he ECB held its refinancing and deposit rate unaltered at 0% and -0.4% respectively, although claimed that it could increase its QE programme in terms of size or duration should the outlook in the Eurozone become less favourable. President Mario Draghi also fell short of altering its forward guidance as some had anticipated, although he did acknowledge the improvements in economic conditions by claiming that the economy was “moving towards a more balanced configuration”.

However, Draghi sounded worried about the inflation miss in March, and remained convinced that price growth would not reach the ECB’s “close to but below 2%” target unless stimulus measures are kept in place for a very long time. Much of the market is now preparing for a more hawkish assessment of the economy at the next meeting in June, which could open the door for deposit rate hikes in 2018. We think we’ll need to see a more sustained pick-up in core inflation in the coming months before the ECB even begins considering raising interest rates or adjusting its relatively dovish set of communications.

Overall yesterday’s announcement was exactly in line with our views. The market had built up expectations for some discussion on bringing forward the timeline for either hikes or paring down QE. Draghi’s pushback against these expectations ensured the Euro ended the press conference lower against the US Dollar and under pressure throughout the rest of trading.

Major currencies in detail

GBP

Sterling rose for the third straight session against the US Dollar on Thursday, rallying to a fresh six-and-a-half month high against the greenback. Investors continue to react in a positive fashion to the prospect of a snap election in the UK, in which Theresa May’s Conservative party are expected to once again emerge as comfortably the largest party.

The Pound has now risen by over 3% against the Dollar since Theresa May called for a snap election a little over a week ago. The next main test for the UK currency will be this morning’s preliminary first quarter GDP numbers, which are expected to show a modest slowdown on the fourth quarter of last year.

EUR

Today’s inflation numbers could prove to be the most significant economic data release of the week. It is clear following yesterday’s meeting that the European Central Bank is concerned with the outlook for inflation and would need to see a more sustained pick-up in prices before it changes its policy. Today’s data could show tentative signs that inflationary pressures are returning. The headline rate of inflation is expected to have increased to 1.8% in April, with the core measure forecast to hit 1% for the first time since the beginning of 2016.

Earlier in the day, consumer and business confidence data out of the Eurozone continued to suggest that the economy was improving, with both now at multi-year highs. German inflation also came in at an above forecast 2%, boding well for today’s Euro-wide measure.

USD

The US Dollar rose for the day against its major peers, largely off the back of broad Euro weakness. Dollar traders mostly overlooked yesterday’s durable goods orders data, which were actually fairly disappointing. Sales rose by just 0.7% in the month to March, although the 0.6% upward revision in the February data made up for much of the shortfall.

Investors will now turn their attention to next week’s Federal Reserve meeting. We expect the FOMC to keep rates unchanged. The challenge for the Fed will be acknowledging the apparent slowdown in economic activity in the first quarter of the year, while also preparing the market for higher rates in June.