ECB tweaks policy guidance but euro falls on trade war fears

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ECB tweaks policy guidance

Summary:

  • ECB removes easing bias from its forward guidance
  • 2018 real GDP forecast to rise 2.4% and 1.9% in 2019
  • Draghi downplays the hawkish statement during the press conference
  • Euro currency posts losses following Draghi’s comments
  • S. tariffs on steel and aluminum stokes fears of a full-fledged global trade war
  • Mexico and Canada exempt from the new tariffs

The European Central Bank held its monetary policy meeting last week. The ECB tweaks policy guidance in an apparent shift, the central bank was seen removing the easing bias from its forward guidance.

The central bank left interest rates unchanged at its meeting last week while also maintaining the monthly asset purchases at the pace of 30 billion euro per month. Investors were mainly focusing on the changes to the forward guidance which the central bank was contemplating upon since the December meeting last year.

Initially, reports suggested that officials wanted to change the language in order to reflect the changes in the fundamentals. However, weaker inflation in January saw ECB officials being somewhat hesitant, according to the minutes of the meeting that was released later.

The central bank had until the March meeting maintained that it would keep monetary policy accommodative and that it would stand ready to increase the asset purchases both in size and time if economic conditions had deteriorated.

However, the March monetary policy meeting statement showed that the central bank removed this easing bias. The change sent a signal to the markets that the ECB’s stimulus program could be coming to an end by September.

Justifying the removal of the easing bias, Draghi said that the solid economic recovery in the eurozone had supported the officials’ view to tweak its language.

“Incoming information… confirms the strong and broad-based growth momentum in the euro area economy, which is projected to expand in the near-term at a somewhat faster pace than previously expected,” the minutes showed.

Earlier last week, the final revised GDP for the fourth quarter of 2017 showed that the eurozone GDP expanded at a pace of 0.6% on the quarter. Despite being revised slightly lower than the initial reported figures of 0.7%, the eurozone economic was seen expanding at the fastest pace in a decade.

ECB gives updated forecasts for the eurozone

The central bank also updated its quarterly forecasts by noting that it expects the eurozone GDP to advance 2.4% in 2018 and at a slower pace of 1.9% in 2019. Speaking at the press conference, Draghi said that the outlook for real GDP growth was revised higher for 2019.

The forecasts also confirmed the broad consensus view that the European Central Bank could be looking toward policy normalization going forward.

Following the hawkish comments, the euro currency was seen rising as investors viewed the outcome as hawkish. The common currency touched highs of 1.2411 against the U.S. dollar but soon reversed those gains.

The losses came as Draghi downplayed the previous hawkish communication from the monetary policy meeting. In an apparent dig at President Trump’s protectionist policies, Draghi warned that it could quickly escalate into a global trade war.

Later in the day, President Trump signed the steel and aluminum tariffs on imports with only Mexico and Canada being exempt from the new law. This sent the currency markets to spiral downward while yields in the bond markets were seen to be mixed.

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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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