As expected, the ECB’s July meeting passed without surprise as the bank kept policy unchanged, a move that was widely expected. The details of the statement were unchanged from last time around with the bank reaffirming its commitment to winding down its QE program by year end alongside keeping rates at current levels until at least summer 2019.
Specifically, the statement noted that “The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2 percent over the medium term,”
ECB QE To End
The ECB’s announcement regarding the end of QE come after the bank has spent more than 2.5 trillion EUR purchasing bonds since 2015 while keeping its deposit rate below zero, meaning that banks have essentially been charged for storing their money with the central bank. This has all been in an effort to boost inflation back up to the bank’s 2% target. With inflation now hovering around 2% the bank has now declared its intention to move back towards policy normalisation though has been keen to stress that it wants to do so in a way which will mitigate against shocks to the market, allowing the recovery to stay on track.
Notes from the press conference:
Following the unchanged statement, focus then shifted to the press conference with the market keen to hear the bank’s assessment given the current trade climate.
Too Early To Comment On Trade Talks
Regarding the impact of Trump’s trade policies on the EU, Draghi said that it is “too early” to make an assessment though the recent agreement between the US and Eu following Juncker’s meeting with Trump is “a good sign”. Specifically, Draghi said “It is a good sign, because in a sense it shows that there is a willingness to discuss trade issues in a multilateral framework again,”
These comments come after Draghi warned months ago in March, at the time when Trump was first threatening trade tariffs on Europe that “unilateral decisions are dangerous”. Speaking at the time, Draghi added “What strikes me is whatever convictions you have about trade, we are convinced that disputes should be discussed and resolved in multilateral framework,”
Stimulus Still Needed
Speaking on the domestic economy during the press conference, Draghi said that “significant monetary policy stimulus” is still required in the eurozone despite having announced last month that QE would be wound down by year end. The ECB chief commented that “Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term.”
In all the meeting was mostly a non-event as the statement remained unchanged from last time around and the press conference saw the ECB chief giving very little in the way of new information. Having reaffirmed its commitment to ending QE by year and along with keeping rates unchanged through summer 2019 focus will now remain on incoming data. With recent readings continuing to highlight weakness in the economy, there is nothing as yet to suggest that the ECB will move its rate hike timing forward and if anything, prolonged data weakness runs the risk of seeing QE extended or rates on hold for longer than forecast.
The block of consolidation underpinned by the 1.1540s level support continues to persist in EURUSD. If price can rally from here, the potential for a right shoulder to form around the 1.20 – 1.21 level remains in lay, suggesting the likelihood of a large head and shoulders pattern. Alternatively, if the current support is broken, focus will shift to immediate downside.