Euro Slips as Super Mario Strikes Again
Above: ECB President Mario Draghi did it again - he successfully sent the Euro and Eurozone bond yields lower in an effort to ensure his quest for higher inflation is achieved.
Euro to Pound Sterling exchange rate is quoted at 0.8430, down from the day's high at 0.8496.
The Pound to Euro exchange rate is at 1.1863, up from the day's low at 1.1769
The Euro to Dollar exchange rate is at 1.0888, down from the day's high at 1.0933.
ECB President Mario Draghi did just enough to push Eurozone bond yields and the value of the Euro exchange rate complex lower on Thursday, April 27.
The European Central Bank announced the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively.
The asset purchase programme - also known as quantitative easing - will continue to run at the monthly pace of €60 billion until the end of December 2017, or beyond, if necessary.
This was expected and the Euro held firm. But it was during the press conference that the selling began as the seasoned veteran of expectation-quashing went to work.
Draghi notes the Eurozone economic recovery is becoming increasingly solid and downside risks have further diminished.
But, inflation pressures remain subdued and are yet to show a convincing upward trend, particularly core inflation:
No change to the Bank's agenda will be forthcoming until inflation goes higher - and inflation is the bottom line for the the ECB which has no mandate to target economic growth.
"The Euro drops as ECB's Draghi says there is no sufficient evidence to alter inflation outlook, no evidence of self-sustaining inflation move," says Holger Zschaepitz, Senior Editor of the Financial Desk at Welt.
Volatility in the headline inflation rate means we need to look through volatility argues Draghi referring to that patch of strong inflation we saw earlier in 2017.
In short, further support from the ECB is required to keep inflation sustained, and the Euro doesn't like this.
"If the outlook becomes less favourable, we stand ready to increase our asset purchase programme in terms of size and/or duration,” warns Draghi.
"The crux of today’s presser was the fact that even though macro growth has improved and certain Governing Council members are more 'sanguine' about economic risks, the inflation outlook has not improved sufficiently for the ECB to formally consider an end to QE. Barring a wholesale change in opinion among the Governing Council against Draghi’s position, ECB QE is here to stay for now," says Ranko Berich, Head of Market Analysis at Monex Europe.
“The Euro, after a brief appreciation, is again showing the classic “Draghi effect” and is down on the day. How durable this euro weakness will be remains to be seen – after all, today’s presser has basically been a confirmation of the status quo,” says Berich.
There is the assumption that the Euro is unlikely to gain any major upside traction until such a time as the ECB communicates it is ready to cut back on its bond buying programme, or raise rates from record lows.
The debate therefore becomes one of when the ECB will start hinting at such a move.
“The ECB could change its forward guidance on policy rates at the meeting in June when it will have updated macroeconomic projections,” says Pernille Bomholdt Henneberg, Chief Analyst at Danske Bank in Copenhagen.
Henneberg is however wary that the ECB will stick to a more cautious approach.
Draghi has himself noted, :Before making any alterations to the components of our stance - interest rates, asset purchases and forward guidance - we still need to build sufficient confidence that inflation will indeed converge to our aim”.
Danske Bank still believe the ECB will announce an extension of its EUR60bn monthly QE purchases at the September meeting and continue the programme in 2018.
The base-case scenario for the Euro is that it should maintain current levels over the near-term until another major catalyst is found.
However, Peter Rosenstreich at Swissquote Bank in Gland, Switzerland, says those hoping for a stronger Euro might have to wait until the Autumn:
“To keep everything neat and tidy, Draghi undoubtedly linked any future decision on monetary policy to inflation forecasts. Given the direction of inflation, we anticipate the ECB will be challenged with a decision to make by September, so Euro bulls will need to wait.”
Clearly the market was disappointed with Draghi’s avoidance of any suggestion of tapering in the near term.
Rosenstreich says we should see further EUR selling against the USD as the Fed remains the only G10 central bank in tighten mode.