Draghi Speech sends the Euro Lower on Confirmation ECB Not Yet Ready to Withdraw Stimulus

The Euro was seen edging lower in European trade on Thursday, April 6 after the President of the European Central Bank (ECB) Mario Draghi told an audience that before altering the ECB’s stance on monetary policy he needs sufficient confidence inflation will remain robust.

Draghi made the comments in a speech at The ECB and Its Watchers XVIII Conference in Frankfurt.

Markets took the content of the speech as confirmation that there will be no kind of withdrawal of quantitative easing nor will there be interest rate rises - two actions required to propel the Euro to higher levels.

Draghi: Before altering stance need sufficient confidence inflation will converge to our aim & remain even in less supportive conditions

— ECB (@ecb) April 6, 2017

“Inflation dynamics continue to depend on the continuation of our current monetary policy stance – a stance that is determined by the interaction between all three main policy instruments: interest rates, asset purchases and forward guidance on both,” says Draghi.

Inflation across the 19-country eurozone fell sharply in March due to weaker price increases partly related to the timing of Easter, official figures showed Friday, in a development that's likely to ease the pressure on the European Central Bank to rein back its stimulus efforts soon.

The European Union's statistics agency, Eurostat, said the annual consumer price inflation rate was 1.5%, down from February's four-year high of 2%. That puts inflation back below the ECB's target of just under 2%.

This suggests the ECB is in no mood to start tapering its asset purchase programme or begin raising interest rates - an assumption that has seen the Euro move higher against the Pound and Dollar over the course of 2017.

With this message we could well see further Euro weakness.

Indeed, we have recently published the views of Willem Verhagen, Senior Economist, Macro & Strategy at NN Investment Partners, where he warned the ECB won’t start moving on policy until we are well into 2018.

The views of Draghi come a week after Benoît Cœuré, Member of the Executive Board of the ECB, told an audience at an event organised by Bruegel in Brussels that, "the latest incoming data have shifted the balance of risks for growth towards neutral territory."

We saw the Euro soften on these remarks.

Both Draghi and Cœuré have delivered a tone that would appear to back up a report that emerged late in March that the ECB was unhappy with the market’s response to their March policy meeting in which the Euro and Eurozone bond yields rose.

Policy makers at the ECB clearly want the current conditions of low rates to extend and support the recovery and they feel that the time to advocate for this is now.

Ahead, Praet and Coeure also speak in Frankfurt, Weidmann in Berlin and Constancio in Malta.

"They collectively remain dovish amid political uncertainty, so while I'm convinced there's a significant Euro spike coming after the French elections, I doubt we can break ranges in the near term," says Kit Juckes, an analyst with Societe Generale in London.

Cœuré: 

Benoit Cœuré has also spoken at the same event as Draghi and he maintains a tone suggestive that the ECB is not rushing to raise interest rates or withdraw quantitative easing.

Cœuré says an interest rate rise will come only towards the end of the quatitative easing programme, therefore those Euro-bulls who were bidding the currency in anticipation of a December interest rate rise will be disappointed.

The Euro has however pared its earlier losses.