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Contributors ECB Draghi Drops Bombshell on EUR, Signals Easing in June

By Kathy Lien

ECB President Draghi dropped a bombshell today on the euro when he said the central bank is comfortable with easing after the staff forecasts are released in June.  Going into today’s press conference investors were looking for 2 things – an intensification of criticism of the euro or a clear sign that the ECB is ready to increase stimulus over the next few months and Draghi delivered on both.  He called the strengthening of the exchange rate a “serious concern,” which alone would not have been extremely negative for the euro but Draghi also indicated that the central bank was ready to ease next month.  Despite an increase in economic activity and uptick in inflation in April, the ECB feels that an extended period of low inflation, the risks to the economic outlook and a strong euro puts enough pressure on the region to warrant additional accommodation.  We believe that if the central bank eases in June, their most likely course of action will be a cut to the refi rate and/or move to a mildly negative deposit rate.  The euro will suffer from the fact that the ECB is one of the few central banks planning to increase stimulus.  Also, there’s no Federal Reserve meeting in May (next one is on June 18th), so between now and the June 5th ECB meeting, the risk is the downside for EUR/USD. At minimum, we are looking for a minimum move down to 1.3700.

My Top Takeaways ECB Press Conference

Summary – EUR comes within 7 pips of 1.40 only to drop below 1.39 after Draghi says ECB could act in June.  If they ease, it will most likely be a cut to the refi rate or a mildly negative deposit rate

Here’s everything you need to know about the key points made in the press conference

1.     ECB Comfortable with Acting in June after Staff Forecasts are Released
2.     Strengthening of Exchange rate in Context of Low inflation is “Serious Concern”
3.     Concern over FX rate will have to addressed
4.     Strong EUR caused by inflows
5.     The era where the ECB never pre-commits ended “a long time ago”
6.     Sees Downside Risks to Economic Outlook, cites Financial, Emerging Market and Geopolitical risks
7.     Ready to act swiftly if needed. May consider unconventional measures. Sees rates at present or lower level if needed
8.     Firmly reiterates Forward Guidance
9.     The longer the period of low inflation, the longer the risk of de-anchoring expectations
10.   Inflation risks broadly balanced, to rise gradually in 2015
11.   Survey data consistent with continued moderate recovery. EZ unemployment stabilizing
12.   Moderate recovery proceeding as expected. Prolonged period of low inflation, then prices to rise gradually after

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