The euro came under heavy selling pressure yesterday in response to fresh dovish comments from ECB president Draghi.
Draghi spoke at the ECB’s Sintra conference in Portugal. During his speech, he gave the market a very clear signal that the ECB intends to ease further ahead of his term ending in four months.
Fresh Stimulus Signals
Draghi explained that if inflation fails to make it back to the ECB’s 2% target in the near term, it could warrant additional stimulus. Draghi stated:
“In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required. That aim is symmetric, which means that, if we are to deliver that value of inflation in the medium term, inflation has to be above that level at some time in the future.”
Draghi Notes Ample Room To Act
The ECB chief was also keen to note that the ECB has “considerable headroom” for additional asset purchases. He went on to affirm that “further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools”.
Commenting on the situation further, Draghi said:
“We will use all the flexibility within our mandate to fulfil our mandate – and we will do so again to answer any challenges to price stability in the future.”
Inflation Falling in Eurozone
Draghi’s comments come on the back of the latest data for the eurozone. This showed inflation falling to just 1.2% in May, down from the prior 1.7% in April. Alongside this, a key indicator showed long term market inflation expectations falling to 1.135% as of Friday, its lowest ever reading.
Draghi’s verbal intervention has so far been successful in boosting inflation expectations and weakening the euro. This comes after an unconvincing statement from the ECB at its last meeting which failed to reassure investors.
The prospect of further, multi-pronged stimulus from the ECB has had a powerful effect on EUR sentiment which has not gone unnoticed by other countries.
Trump Attacks ECB
President Trump has been quick to criticize Draghi and the ECB. Taking to Twitter, Trump wrote:
Draghi Still Has Limits To Consider
While Draghi’s words have had a powerful effect so far, when it comes to actually implementing them, there could be some difficulty.
The ECB’s decade long program of easing has used up the vast majority of the resources available to it. The deposit rate dropped to a record low of -0.4% in 2016 and the bank’s massive $1 trillion QE program acquired nearly all the government bonds it could buy. Following this, the Governing Council introduced a cap on the amount of sovereign debt which the ECB can purchase.
This limit was set at 33% of a country’s total debt. While Draghi said that the ECB now has “considerable headroom” to act, he was quick to clarify these comments saying:
“The Treaty requires that our actions are both necessary and proportionate to fulfill our mandate and achieve our objective, which implies that the limits we establish on our tools are specific to the contingencies we face. If the crisis has shown anything, it is that we will use all the flexibility within our mandate to fulfill our mandate.”
EURUSD’s recent failure at the 1.1323 level and bearish trend line has seen price moving back down towards the 1.1112 base. For now, price looks likely to continue to range between the two levels. However, the FOMC later today could provide a catalyst for a fresh directional move.
GER30 has rallied strongly on talk of fresh stimulus. Price is now back above the supporting line of the bearish channel from last year’s lows as well as structural resistance at 12210.5. The next level to watch is the 12425.2 level to the topside and 2019 highs. A break of this level should see fresh momentum players entering the market.