Talking Points- ECB maintains view that deflation is not an issue.
- Euro jumps across the board as it’s clear it will take further weakness for ECB to act.
- Further EURUSD gains contingent upon US NFPs tomorrow.
Market participants weren’t expecting the European Central Bank to do much of anything today, and the consensus Bloomberg News forecast nailed the decision to hold the main interest rate at 0.25%. However, given the reaction seen in the Euro, it appears that traders were expecting a less optimistic President Mario Draghi at the ECB’s press conference.
The ECB’s press conference was more of the same: President Draghi harped that inflation remained low, that credit growth was weak, that unemployment rates remain too high; and that growth should resume shortly. After the weakest Euro-Zone inflation print in the post-2008 crisis era, there was budding sentiment that the ECB would cut its main interest rate to 0.10% from 0.25%, and that future measures to make policy even more accommodative than it is currently would be proscribed. No such efforts were outlined allowing the Euro to run higher.
It’s evident that, in absence of crisis conditions, the ECB prefers not to provide further liquidity to the banking system in an inorganic way (another LTRO or QE). A BoE-styled Funding for Lending Scheme (FLS) could address credit concerns without putting the Euro at risk of a massive ECB balance sheet expansion that another LTRO or a Fed-styled QE would bring.
EUR/USD: 5 Minute" title="EUR/USD: 5 Minute" height="312" width="627">
Charts Created using Marketscope – prepared by Christopher Vecchio
The Euro initially slipped as the press conference began, but the reaction lower was clearly misguided once President Draghi started speaking. The optimistic tone surprised market participants, provoking a reversal of recent Euro losses across the board in a swift fashion.
The EURUSD opened the press conference at $1.3493, dropped to a session low of 1.3483, and then jumped to a fresh daily, weekly, and monthly high of 1.3618. At the time this report was written, the pair was holding near the highs at 1.3616. For up to the minute charts and analysis on the EURUSD and other EUR-crosses.
--- Written by Christopher Vecchio, Currency Analyst.