As expected, the ECB maintained policy at current levels at the January meeting held today, with a statement that was little changed from last time around.
However, in light of the continued trend of negative data out of the eurozone, as well as increasing geopolitical uncertainty around issues such as Brexit and the Yellow Vest protests in France, the market was keen to hear further details in the ECB press conference following the rate decision.
Key Notes From The Press Conference
- “The persistence of uncertainties, in particular, relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment.”
- “We continue to expect 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 our objective over the medium term “
- “The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.”
- “Incoming information has continued to be weaker than expected on account of softer external demand and some country and sector-specific factors.”
- “We intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary.”
- “Underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion, and rising wage growth.”
- “Significant monetary policy stimulus remains essential to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This will be provided by our forward guidance, reinforced by the reinvestments.”
All in all, the press conference was a very dovish affair with Draghi acknowledging the continued weakness in data, accepting that risks have tilted to the downside and declaring that the ECB stands ready to adjust any and all instruments in an effort to sustain inflation.
While Draghi continues to maintain that inflation is expected to increase, the rising threat around trade protectionism, fragile emerging markets, and financial market volatility mean that the ECB needs to maintain an accommodative stance in order to keep eurozone growth alive. With this in mind, it seems that the first ECB rate hike will now be pushed out later than the current Q3 date penciled in by the market.
The sell-off in EURGBP continues, fuelled by Draghi’s dovish press conference. Price is now challenging the rising trend line from 2017 lows with a further trend line sitting just beneath, running from the 2018 lows.
Also in the area, we have structural support at the .8658 level which was the late 2018 low. A break of these levels will be particularly bearish for EURGBP which has been under heavy selling pressure over recent months.