ECB Keeps Policy Unchanged
In line with broad market expectations, the ECB kept monetary policy unchanged at its April meeting held today. The bank kept its main refinancing operations at zero and the interest rates for the marginal lending facility and the deposit facility at 0.25% and -0.40% respectively.
We continue to expect interest rates to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases
What is known is that recent events [regarding protectionism] have a profound and rapid effect on business and exporters’ confidence and that in turn can effect the growth outlook.
Net asset purchases, at the current monthly pace of €30bn, are intended to run until the end of September 2018, or beyond if necessary. In any case it will run until the Governing Council sees sustained adjustment in the path of inflation that is consistent with the inflation aim.
Regarding growth, Draghi has acknowledged that there has been a “pull back” from the high growth readings seen earlier in the year though said that “Overall, however, growth is expected to remain solid and broad-based,”
Draghi Highlights Protectionism Concerns
In terms of risks to the outlook Draghi noted that the threat from US protectionism had become “more prominent”, though he did stress that the ECB is confident that it is on track towards gradually removing ultra-loose monetary policy which has been in place since the global financial crisis. In summary Draghi said that “the bottom line is… caution in reading these developments, caution tempered by an unchanged confidence in convergence of inflation to our inflation aim.” Draghi said that he expected inflation to “hover” around 1.5% “for the remainder of the year”.
The eurozone economy has expanded for 20 consecutive quarters, creating millions of new jobs, and investor expectations have grown regarding normalisation of ECB policy. These expectations were confirmed at the last meeting when the bank said it was removing its easing bias.
Draghi’s concerns about US protectionism come at a time when the broader market is closely watching developments with US trade policy given the recent escalation in tensions between the US and China. Indeed, in the eurozone, confidence among businesses is likely taking a hit as the exemption on tariffs for EU steel and aluminium shipped to the US is due to expire soon. Prior to the US granting the exemption, the EU had threatened retaliation against the US with its own taxes on key US goods such as Levi’s jeans and Kentucky whiskey. Commenting on this issue Draghi said that “These events have a profound and rapid effect on confidence. Confidence in turn can affect the long term outlook”.
Once again Draghi highlighted that the ECB will be keep rates at their current low levels until “well past” the end of its asset purchase program. However, with just two meetings left until September, at which point the ECB’s bond purchase program is due to end, many are now questioning whether the central bank is indeed going to turn off the tap. Or alternatively, it will be forced to keep buying bonds past this point “if necessary” as Draghi has said it will. Draghi’s comments on the bank’s willingness to extend purchases has put fresh bearish pressure on EUR, as bulls were left disappointed by a meeting which dampened hopes of a faster-than-expected ECB monetary policy normalisation.
Positioning & Technical Perspective
With EUR longs having surged to fresh highs going into the meeting, the sense of disappointment is vivid and positioning squaring has been steady since the meeting took place, as shown in the price action.
The sell-off in EURUSD has seen price trading back down below the 1.2095 level late 2017 high to test the 50% retracement from the November 2017 low. This is a key area of technical support and a weekly close below this area suggests further downside with the 1.1974 level the next key support.