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2 Nov 2015
EUR: Draghi provides some balance to market expectations
FXStreet (Delhi) – Derek Halpenny, Research Analyst at MUFG, notes that the euro has rebounded modestly today in response to weekend comments from ECB President Draghi who stated in an interview with Italian daily, Il Sole 24 Ore that it remained an open question whether the ECB would implement additional monetary stimulus.
Key Quotes
“This may lift the euro further at the start of a very busy week for the financial markets but these comments really aren’t of great significance. As we all know, central bankers never pre-commit when it comes to monetary policy decisions and it is merely a statement of the obvious that a monetary policy decision on 3rd December was still an open question. We have a full month of economic data and the financial markets should be a lot clearer by then on whether the FOMC will be raising the key rate at its meeting in December.”
“Importantly though, the comments from President Draghi to the Italian media do not detract from the monetary policy press conference given on 22nd October. There was a clear shift in bias relayed to the markets on that day including a U-turn on the previous message that the deposit rate would not be cut again.”
“That U-turn was intentional and reflected increased concerns within the ECB Council over the price stability mandate and an obvious growing view that further monetary stimulus would be required. Furthermore, there has been no obvious surprise in the economic data flow since the ECB press conference to justify an intentional reversal of the views expressed at the press conference.”
“President Draghi did reiterate that the ECB had assigned ECB staff to assess monetary policy options and based on updated staff projections and policy options a decision would be made at the meeting. Crucially in regard to the deposit rate “lower bound” Draghi stated that this was a “technical constraint” and could be changed depending on the circumstances, adding that the achievement of its inflation mandate and not how the tools are implemented would be key to ECB credibility.”
“These comments may reflect the fact that EUR/USD has fallen sharply, perhaps more sharply than the ECB had expected. If Fed rate increase expectations were to rise sharply and EUR/USD was to drop, say to 1.0500 or below, the urgency for the ECB to act would certainly be less, especially if US and China data were to clearly improve through the month of November. So the comments might certainly reduce the risk of a further sharp drop in EUR/USD ahead of a key week for the financial markets with a large number of Fed speakers and the NFP report on Friday.”
Key Quotes
“This may lift the euro further at the start of a very busy week for the financial markets but these comments really aren’t of great significance. As we all know, central bankers never pre-commit when it comes to monetary policy decisions and it is merely a statement of the obvious that a monetary policy decision on 3rd December was still an open question. We have a full month of economic data and the financial markets should be a lot clearer by then on whether the FOMC will be raising the key rate at its meeting in December.”
“Importantly though, the comments from President Draghi to the Italian media do not detract from the monetary policy press conference given on 22nd October. There was a clear shift in bias relayed to the markets on that day including a U-turn on the previous message that the deposit rate would not be cut again.”
“That U-turn was intentional and reflected increased concerns within the ECB Council over the price stability mandate and an obvious growing view that further monetary stimulus would be required. Furthermore, there has been no obvious surprise in the economic data flow since the ECB press conference to justify an intentional reversal of the views expressed at the press conference.”
“President Draghi did reiterate that the ECB had assigned ECB staff to assess monetary policy options and based on updated staff projections and policy options a decision would be made at the meeting. Crucially in regard to the deposit rate “lower bound” Draghi stated that this was a “technical constraint” and could be changed depending on the circumstances, adding that the achievement of its inflation mandate and not how the tools are implemented would be key to ECB credibility.”
“These comments may reflect the fact that EUR/USD has fallen sharply, perhaps more sharply than the ECB had expected. If Fed rate increase expectations were to rise sharply and EUR/USD was to drop, say to 1.0500 or below, the urgency for the ECB to act would certainly be less, especially if US and China data were to clearly improve through the month of November. So the comments might certainly reduce the risk of a further sharp drop in EUR/USD ahead of a key week for the financial markets with a large number of Fed speakers and the NFP report on Friday.”