The ECB Decision: Dovish Remarks & Rates at Record Low

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The European Central Bank today decided to keep the current policy unchanged including the three main rates.

The ECB Refinancing Rate at record low 0.0% and the deposit rate at -0.4%. However, the statement showed some dovish remarks, which should not be a surprise, especially that the 2nd round of the French election is around the corner.

The ECB will try to stay dovish as much as possible as the risk of the French election is still there. Moreover, the Euro has been gaining momentum and its not in the ECB’s interest to have a stronger Euro anytime soon.

Tapering Underway

The ECB Chairman Mario Draghi confirmed that the tapering process is underway at 60B Euros in monthly purchases instead of 80B euros previously.

Such process is likely to end by the end of this year. However, in his press conference, Mario Draghi hinted that there is a possibility to increase or decrease the QE size based on future economic conditions.

At the same time, he also mentioned that rates are likely to stay lower for longer with a possibility to cut them if needed.

Positive Outlook

Draghi showed some optimism, saying that risks are on the downside, and growth seems to be solid, and stayting that he expects inflation to stabilize above or below the 2%.

The ECB also showed a brighter outlook for growth and the economy in general, despite the fact that he also noted that the risk remains from global factors and not internally.

Draghi also refused to comment on the political situation in France, saying that the ECB does not act to political situations.

Dovish Remarks

Despite the positive remarks by Mr. Mario Draghi, he also has some dovish remarks, when he noted there is no significant evidence that there is a trend in inflation.

This means that the ECB is not worried about the recent increase in inflation figures, and this also explains why the ECB did not discuss any exit policy.

German Inflation Rises In April

Right after the ECB decision, the German inflation figures were released, which came in with a positive surprise, whether on MoM or YoY.

The YoY CPI advanced to 2% again, which is the highest level in two months, despite the fact that the estimates were to rise to 1.9% only.

Moreover, the MoM was expected to decline by 0.1%, yet it came in unchanged.

Overall, the inflation figures are showing encouraging signs, but this might not be the right time for inflation to overshoot since the rates are very low and the deposit rate is at -0.4%.

EURUSD May Test 1.10 But Watch Out

The Euro traded within the same tight range since the beginning of the day, spiked right after the positive remarks all the way to 1.0935 but dipped lower back to 1.0875 right after the exit policy comment.

For the time being, there is still a possibility for an additional rally, which might target 1.10 psychological resistance. However, above that level is unlikely.

Traders need to watch out from EURUSD longs, especially that the Euro haven’t filled the gap that occurred at the beginning of this week.

Therefore, I would still be more interested in shorting the Euro until the gap is filled, before switching the strategy into buying the dips strategy.

 

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