Pound-Euro Rate Back Above 1.15 as Traders Hit the Sell Button in Wake of ECB Event

- Euro takes a rollercoaster ride during and following ECB meeting

- Draghi overlooks loss of momentum to focus on longer-term uptrend

- Traders suspect growth fears may still have been at forefront of ECB's mind

© Grecaud Paul, Adobe Stock

Traders have initiated a sharp sell-off in the Euro following the April European Central Bank (ECB) event, resuming a trend that has been in place over recent days.

The ECB's official monetary policy statement and actual policy settings remained unchanged, while ECB President Mario Draghi shrugged-off growth momentum fears but ultimately gave traders little reason to bid the Euro higher.

The single-currency rose marginally during the event, ending the press conference higher, in line with most analysts pre-meeting slightly bullish Euro estimates, however, later traders sold the Euro as faith evaporated.

Indeed it may be traders were reacting to the insight that the only 'certainty' was that nothing is certain in relation to ending the ECB's stimulus programme (QE).

"Though this press conference conveyed a 'steady as she goes' approach by the ECB, quite simply, nothing should be taken for granted as regards the ECB’s existing timetable for wrapping up QE," says Neil Mellor, chief currency strategist at BNY Mellon.

In the press conference Mario Draghi announced the governing council's message was for "caution tempered by an unchanged confidence that inflation will converge to our inflation target over the medium-term but that confidence is conditional on an accommodative monetary policy framework being in place."

The loss of growth momentum in the Eurozone at the start of 2018 was observed as a temporary phenomenon due to "bad weather, strikes and the timing of Easter," according to ECB President Mario Draghi.

Draghi dismissed the slow-down as of little consequence to the broader themes of regional growth and convergence with more normal levels of inflation in the medium-term - at or just below the ECB's target of 2.0%.

Growth had been the main focus of the meeting, said Draghi, admitting that it had eclipsed conversations about the future of actual monetary policy which was not discussed per se, but rather each central bank member reported on the growth picture in their individual country.

The admission prompted a German journalist in the audience to question the president on "why monetary policy had not been discussed.. in a monetary policy meeting", to which Draghi said that the ECB first required a better understanding of the underlying trends since the start of the new year before formulating future policy.

The implication seemed to be that behind the dismissive rhetoric the ECB was actually taking the slowdown more seriously, perhaps, than it wished to let on.

This may be why the Euro fell so precipitously after the meeting and the press conference, in a delayed reaction.

At the time of writing, EUR/USD had fallen to 1.2124 from a pre-meeting level of 1.2175 and the Pound-to-Euro exchange rate had risen to 1.1510 from 1.1480 prior to the meeting.

"The ECB didn’t actually do much this Thursday – and that was maybe the problem. Draghi’s typically cautiousness post-meeting address seemed to upset the Euro, specifically his claim that the central bank ‘didn’t discuss monetary policy per se’,  to instead focus on the topic of the Eurozone’s recovery and how ‘broadly all countries experienced... some moderation in growth or some loss of momentum’ in the last month. The currency is clearly frustrated with the ECB’s lack of clarity in signalling whether or not its bond buying scheme will end before the year is over," says Connor Campbell, an analyst with Spreadex.

Antoine Lesné, a global advisor at State Street argued that the relative slowness of the ECB in officially recognizing the slowdown was indicative of a fairly large hawkish contingent on the governing council still keen to end QE.

"As some ECB members are still keen to see an end to the asset purchase program, forward guidance was not going to be changed so quickly and the exercise of the day was to not change course too quickly," said Lesné.

The overall canvas appeared to show growth was slowing down quite broadly in the region but not disastrously, and that it was to some degree to be expected after such a strong run. Draghi described the slowdown euphemistically as a "moderation" or "normalisation" to reinforce the still-benign overarching conditions.

Nor was it clear yet whether the restrained economic expansion of Q1 was due mainly to supply constraints such as was evidenced by the problems with lack of skilled labour in the construction industry or a possible softening in demand as a result of signs of falling orders in manufacturing. If the latter - demand led - then it would have grosser implications for monetary policy.

Despite defending the course of inflation towards target Draghi also admitted there was no convincing upward trend in inflation, and that it was essentially just going sideways. He nevertheless added the proviso that there were some feint positive signs in nominal wage growth which might support higher inflation in coming months.

The strength of the Euro was not a pressing matter for policy-setters either, and Draghi dismissed the impact of protectionism as so far not material enough to cause concern.

In short, the Euro's recent trend of weakness has been reinitiated by markets now that the hurdle of the ECB event has been passed.

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