ECB Sends Euro Exchange Rates Lower with Dovish Assessment on Inflation
- Written by: Gary Howes
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- Euro to Pound Sterling exchange rate: 0.8650
- Euro to Dollar exchange rate: 1.0683
- Euro to Australian Dollar exchange rate: 1.4124
The Euro was put on the backfoot on Thursday January 19 after the European Central Bank (ECB) warned that it stood ready to boost its asset purchase programme should Eurozone inflation not pick up at the desired pace.
"If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration," said the ECB in a statement concerning their latest policy decision.
For the Euro to have advanced we would have needed to hear that the ECB is happy with the trajectory in inflation and that they were looking to end asset purchases at the current expiry date.
It is the asset purchase programme that keeps Eurozone interest rates low which in turn ensures the Euro remains under pressure.
"Slightly dovish in line with our expectation. Draghi focuses on core inflation, which we don't expect to rise above 1% on avgerage this year," says a quick-reaction note from Danske Bank Research in reaction to the event.
Indeed, the rise in Eurozone inflation has been blamed by President Draghi on the rise in oil prices, and note the core inflation that concerns the Bank more than anything.
Furthermore, in the ensuing press conference Draghi says the ECB has not in fact discussed reducing stimulus.
Draghi gave four parameters for judging whether inflation is “sustainably” higher:
(1) sustainability over a medium-term horizon;
(2) durable, rather than transient, convergence towards the target;
(3) a self-sustaining higher inflation path, even when extraordinary monetary policy support is no longer there; and
(4) higher inflation for the whole region.
"The fourth point addresses complaints about the ECB’s stance from Germany, where inflation soared to 1.7% in December," says Achilleas Chrysostomu at Standard Chartered.
The Euro fell on the ECB event, but gradually retraced many of the losses.
The ECB event comes as the Euro carves out a new uptrend against the US Dollar which has suffered a poor 2017 thus far.
Against Sterling, recent Euro strength has been tempered by the recent disclosure of the UK Government’s negotiating position on Brexit.
"The euro (EUR) softened on Draghi’s dovish tone on underlying inflation; our FX analysts see further scope for EUR weakness, perhaps initiated by the US presidential inauguration and, in the coming months, on European political risks," says Chrysostomu.
The EUR/GBP Technical Outlook
According to analyst Robin Wilkin at Lloyds Bank, EUR/GBP has a negative bias in the short term, after holding the 0.8860 resistance area.
"We see a move down to test support at 0.8600/.8560 but a break there is needed to confirm a deeper decline at this stage. Overall, we believe we are developing into a medium term range loosely between 0.89 and 0.8250," says Wilkin in a note to clients.
Longer term, Lloyds maintain their view that declines from the October highs as corrective, as long as the 0.8300-0.8250 region holds.
"A breakdown through there would suggest the October highs were more significant. Until then, we see the risk of a re-test of those highs and couldn’t rule out a move to the 0.9802 highs set back in December 2008," says Wilkin.
The EUR/USD Technical Outlook
Regarding EUR/USD, Lloyds reckon the EUR is vulnerable as we head into and through the ECB today.
"The recent gains through 1.07 have likely reduced the market’s conviction in the underlying bearish view from last year. Our bias is that we still see a move towards 1.0250, while under 1.08/1.0850. So, on the day, we are watching supports as stepping stones to the level below, lying at 1.0615, 1.0515/10 and then the 1.0355/40," says the analyst.
