Euro surges as Draghi holds status quo

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The euro currency continued to edge higher last week despite the short term risks from the impending ECB monetary policy decision. Draghi holds status quo.

While some parts of the markets were expecting Draghi to address the exchange rate concerns, the euro strengthened partly due to the dovish comments from the U.S. Treasury Secretary Steven Mnuchin.

Mnuchin’s comments come a day before the ECB’s meeting, where he said that a weaker U.S. dollar was good for the economy. This sent the already weak greenback falling further.

While the euro was seen trading around $1.23 levels on Thursday morning, following the ECB’s event the common currency hit levels of $1.25 marking another fresh four year high.

 

ECB leaves monetary policy unchanged

At its first monetary policy meeting of the year, the European Central Bank left key interest rates and its asset purchases unchanged.

This was widely expected by the markets. The ECB reiterated that rates will remain at their current levels for the foreseeable future and even past the life of the stimulus program (which is due to end in September this year).

The main refinance rate remained at zero percent while the deposit rate was unchanged at -0.40% and the marginal lending rate was unchanged at 0.25%. The ECB also did not make any big changes to its monetary policy statement.

There was speculation that the ECB could be preparing the markets for a hawkish forward guidance given the improvements in the economy. This was based on the meeting minutes from December released just a few weeks ago.

“The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases,” the ECB’s statement read.

The central bank affirmed its commitment to keeping its asset purchases at a pace of 30 billion euro per month until September 2018 (and beyond). The central bank also left its previous statement noting that “if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration.”

 

Draghi makes a futile attempt to hit back against Mnuchin

Most of the post monetary policy press conference was focused on the recent strength of the euro’s exchange rate. Draghi said that there were concerns over the exchange rate volatility. He also asserted that an interest rate hike this year was unlikely.

Draghi said that some of the policy makers were concerned over the statements from U.S. officials which touched not just the exchange rate but also the status of international relations.

At the press conference, Draghi painted an optimistic picture noting that the economic expansion in the euro area was robust and that it strengthened the central bank’s confidence that inflation will move closer to the 2% target.

However, previous estimates as early as December showed that the ECB expects inflation to remain below 2% until 2019. Draghi said that an ample degree of monetary stimulus was necessary in order for the underlying inflation pressures to build up.

Inflation in the eurozone was seen to be weaker as core CPI was recorded at 0.9% on an annual basis for the year ending December 2017. This comes after consumer prices briefly spiked during second half of last year.

Speaking about exchange rates, Draghi made it very clear that it was not the central bank’s mandate to target exchange rate. But he said it was important for an economy’s growth and stability.

With the ECB now out of the way, the markets will be looking to macro-economic fundamentals as well as the build-up of political risks which comes from the Italian elections due in March.

 

 

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