ECB April Preview: Dovish rhetoric likely to prevail

Apr 21, 3:40 am
ECB_Draghi

Image via ECB European Central Bank / Flickr

ECB President, Mario Draghi told financial officials in Washington last Friday that the economic outlook for the Eurozone remained clouded in uncertainty and underlined the ECB’s willingness to take more action if needed to drive up weak inflation. Speaking in Washington in the backdrop of the semi-annual IMF meeting, Mr. Draghi warned that the economic signals from the euro area remained mixed and pledged to do “whatever is needed” to drive up inflation back to the ECB’s 2% target, which has consecutively been missed for three straight years.

Mr. Draghi’s comments come ahead of today’s ECB monetary policy meeting. In the previous meeting, the ECB announced major policy changes in a widely expected move which comprised cutting the ECB’s minimum bid rate to zero percent while lowering the deposit lending rate to -0.40% and increasing the central bank’s stimulus program to €80 billion and announced a new LTRO-II lending program for banks.

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The ECB President warned on the risks from emerging markets and uncertainty surrounding oil prices amid geopolitical risks, despite the euro area recovery moving a moderate pace. In March, Eurozone’s inflation was flat at zero while the core CPI remained steady at 1.0%. The ECB expects inflation to remain at or below zero in the near term before ticking higher. He said that it was important for the ECB to ensure that low inflation doesn’t become entrenched.

Mr. Draghi’s comments come after earlier last week; various European Central Bank officials expressed their support and willingness to extend the monetary policy even further if required to boost the Eurozone’s weak economy.

The ECB officials, however, drew a line as to how far they could go. “Helicopter Money” a new term that is gaining prominence is an extreme form of stimulus which involves directly distributing money to the public in forms of tax rebates or other means. This concept has gained prominence as central banks continue to fight stubbornly low inflation. ECB’s chief economist, Peter Praet told an audience in Frankfurt that it was not an option and was underlined by Vitor Constancio, the ECB’s Vice President who said “we are not considering anything of that sort” and quickly added that the ECB has the option to recalibrate its stimulus if need be to deal with any adverse shocks to the economy.

The ECB’s monetary policy meeting minutes from March published on 7th of April showed that the governing council members were concerned on pushing the timeframe for reaching the inflation target further away. The minutes showed that members broadly agreed that there was a need for stronger policy response, but the members differed on the execution of monetary policy. Differences emerged on the scope of cutting the deposit lending rate further with some members questioning the side effects the negative rates would have including cutting into bank’s profits leading to destabilization of the financial system. Other opponents to the ECB’s measures included Jens Weidmann, who commented that the ECB’s latest stimulus measures were unconvincing and went too far especially on the newly launched TLTRO-II due to come into effect in June where banks are paid to borrow money from the ECB.

At the previous meeting in March, while the euro slipped after the policy measures were announced, the single currency trimmed its losses and closed the day higher after Draghi’s press conference where he said that he did not anticipate further rate cuts.

While the April meeting might be missing the fireworks, Draghi could clearly use the opportunity to talk down the euro and undo the damage. EURUSD has been trading fairly tight since March’s ECB meeting before breaking the $1.13-floor last week. A dovish rhetoric from Draghi could potentially see the EURUSD dip towards $1.11 where the next main support level comes in and of course, $1.10 coming as a key psychological support level.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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