Home Euro Bullish as ECB’s Draghi Becomes More Optimistic

Euro Bullish as ECB’s Draghi Becomes More Optimistic

Posted by on March 9th, 2017.

EUR note piles

Today’s European Central Bank (ECB) monetary policy meeting has surprised no one, with interest rates remaining frozen. Benchmark interest rates have stayed at 0.00%, while the deposit rate – i.e. the amount of interest the ECB pays to banks for holding money in its vaults overnight – continues to remain negative at -0.40%.

In fact, the Governing Council left the door open for them to lower rates even further, noting; ‘The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

The ECB also doubled down on its defence of quantitative easing. As well as reaffirming that ‘from April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion’, the Governing Council also sounded firm on its intention to continue with asset purchases, stating that QE would continue ‘until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

The Euro remained in positive territory following the announcement, however. Markets had expected that there would be no changes to monetary policy – in fact, to make alterations without any form of forward guidance would likely have catastrophic consequences. The main event for today was always going to be ECB President Mario Draghi’s press conference, so the Euro remained unaffected in the interim between the announcement of the decisions and the chief policy setter’s appearance.

EUR exchange rates were soon on the rise after Draghi began speaking, however. Draghi started off by announcing that the ECB has raised its growth forecasts for the Eurozone, expecting to see GDP rise 1.7% in 2017 and 1.6% in 2018; this is ten basis points higher than previously in both instances. The outlook for inflation has also been raised, with the ECB now expecting price growth of 1.7% in 2017 – a significant improvement upon earlier forecasts of 1.3%.

Of all Draghi’s comments, two in particular have helped propel the Euro into a bullish rise.

Firstly, Draghi drew attention to the fact that a line stating that the ECB is prepared to use ‘all the instruments at its disposal’ to achieve the mandated targets has been removed from its latest statement. This shows that the European Central Bank is less worried than it was about the fragile state of recovery in the Eurozone. The ‘sense of urgency has gone’, Draghi claimed.

Secondly, the President avoided answering a question about whether or not interest rates could be raised before the quantitative easing programme has finished. Up until now, Draghi has been firmly against raising interest rates until QE was finished, so the fact he refused to comment on the issue could be an indication that recent data is making him reconsider his stance.

As a result, EUR GBP was up 0.4% at 0.86 and EUR USD was up 0.5% at 1.05 at the time of writing.

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