ECB Live: Coverage + Euro Exchange Rate's Reactions vs Dollar, British Pound and More

Looking at the markets, the Euro has started coming off the boil once more. Sterling is back above 1.09 having hit a low of 1.0865. The Dollar has also retraced the worst of its losses. EUR/USD is at 1.1997 having gone as high as 1.2060 earlier.

Image (C) European Central Bank.

Joe Manimbo at Western Union:

"Euro bulls were unfazed after the ECB’s statement took a swipe at its massive gains of more than 13% this year. Until recently, many thought the ECB might use its September meeting to spell out an exit plan from its lavish stimulus measures that have boosted growth but weighed on the euro by anchoring yields, diminishing its appeal.

"The new wrinkle this time was that the ECB stood ready to increase – rather than decrease – stimulus if economic conditions should take a turn for the worse. Still, with the euro zone economy on a bullish path, Mr. Draghi’s caution fell on deaf ears. Given the solid shape of euro zone fundamentals, sooner or later, the ECB seems poised to roll back stimulus, a scenario that would give traction to euro rallies."

David Lamb, head of dealing at FEXCO Corporate Payments reckons the Euro-Dollar exchange rate could now find 1.20 to be a solid level of support:

"The Eurozone’s robust growth – and Mr Draghi’s coded admission that QE could be reined in after the ECB’s October meeting – turned a rise into a rout.

"$1.20 was once seen as a symbolic barrier for the Euro, but on this evidence it could easily become the new normal."

The Euro is a winner of the September ECB event, but could traders be getting ahead of themselves?

Martin Arnold, Director – FX & Macro Strategist at ETF Securities suggests this might indeed be the case:
 
“This was classic Draghi at the press conference: very balanced regarding the economic outlook but very vague regarding the future path for policy.

“We expect the market continues to largely misjudge how cautious the ECB remains in withdrawing stimulus and this could see an unwind of the overstretched long Euro trade.

“The ECB remains in wait and see mode on inflation given the downside risks and although Draghi was certainly not hawkish in his policy commitment (and therefore bullish on the Euro), the broad based weakness of the USD was a contributor to the strong move higher in EUR/USD.”

Image (C) European Central Bank.

Tuuli Koivu at Nordea Markets says the outlook for the Euro remains up:

"The FX rate received a rather prominent role in the press conference. It was first mentioned already rather early in the introductory statement, which stated that the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.

"In the Q&A, Draghi elaborated that the concerns regarding FX moves had increased since the July meeting and most Governing Council members were now concerned.

"However, Draghi did not take the verbal intervention to a higher level. In fact, what he said was already quite a lot considering how the ECB has addressed FX moves in the past.

"Nevertheless, his words were not enough to reverse the course of EUR/USD. As a result, while we expect EUR/USD to fall back in Q4, the near-term direction remains upwards."

Alex Lydall, Head of Dealing at Foenix Partners signals business as usual for the Euro:

“Draghi’s usual candid and methodical stance this afternoon sees markets clinging to the ‘no news is good news’ philosophy. Traders were kept on a knife-edge as Draghi raised growth forecasts but stipulated that the Central Bank failed to discuss the ‘sequence’ of monetary policy tools.

“Despite noting Inflation was set to decrease into the end of this year, a bullish tone was set by markets simply on the fact that no updated bad news was positive momentum for the single state - propping the Euro up once again.

“He reiterated numerous times that growth, inflation and the exchange rate were discussed, not the programme of Quantitative Easing itself, noting that October would see a further disclosure. It is clear Draghi broadcasting what is essentially nothing new, means markets stay continually upbeat, keeping EURUSD high and GBPEUR low.”

The Dollar appears to be more of a victim of this ECB event than any other currency.

The EUR/USD exchange rate is lower by 1.18% at 1.2055. It is fast approaching the 2017 high at 1.2070 reached last week.

This has helped the GBP/USD exchange rate above 1.31.

The broad-based push higher in the Euro has understandably hit the GBP/EUR exchange rate.

Exchange rate seen as one of three topics talked about by the Governing Council.

But - the ECB appears not fussed by the exchange rate as the fundamental conditions in the economy warrant the move. This is a big signal to markets. The ECB is effectively OK with the exchange rate.

This is as bad as it gets for the Euro bulls: "Exchange rate not a policy target, but is very important for growth and inflation," says Draghi.

The ECB will merely monitor the exchange rate.

The Euro has picked up following the release of the ECB's financial forecasts. They obviously see the downgrades to inflation as being less than anticipated. Indeed, 2017 inflation has been left unchanged. We warned earlier that the inflation forecasts would be a key trigger to price action.

Economic Growth Forecast

2017: 2.2%, up from 1.9% previously

2018: 1.8%, unchanged on 1.8% previously

Inflation Forecast

Energy prices cited as keeping inflation soft. "Underlying inflation ticks up modestly but are yet to show convincing signs of a sustained upward trend."

Strengthening of Euro exchange rate cited as reason for downgrade to inflation.

2017: 1.5%, 1.5% previously

2018: 1.2%, 1.3 previously

2019: 1.5%

ECB President Mario Draghi is speaking. He has said recent Euro volatility is a source of uncertainty this is not necessarily the robust attack on the currency many had been expecting. The Euro spiked on the statement but has since stabilised. Flat against the Pound, a good half a percent up on the US Dollar.

The strong Euro is also not seen impacting Eurozone exports which are expected to remain healthy according to the ECB.

Jacqui Douglas, Chief European Macro Strategist at TD Securities:

“We now move into the opening statement press conference, where we see a substantial scope for mis-interpretation and mis-messaging, with the potential for sharp reversals in market moves.

“In the opening statement, we look for downgrades to the ECB’s 2018-19 HICP forecasts, and can’t see any way for Draghi to get around linking the downgrades in some fashion to the strength of the EUR.

“However, we do expect Draghi to rein back some of that concern with the higher EUR with a more balanced and nuanced assessment in the Q&A, linking the EUR to higher growth so giving the go-ahead to further gains in the days ahead.

“This nuance may risk being lost on the market for now. However, we do also look for him to stress the lack of progress in inflation and why further QE is needed, strongly suggesting that there’s still much more QE to come with no quick taper to zero.”

The extent by which the ECB alters its forecasts for inflation when the latest staff projections are released, at the bottom of the hour could be key.

Economists at Societe Generale reckon a 10% appreciation in EUR/USD leads to 30bp lower inflation over the next six quarters. Consider that the EUR/USD has already risen by about 17% in 2017.

Any sizeable downgrade to the inflation forecasts could hit the Euro as it will signal the ECB is not confident enough to withdraw stimulus.

Recall many were anticipating the ECB to use this meeting to signal the intention to reduce asset purchases. The decision has been kicked down the road, most likely in order to keep a lid on the Euro.

Dennis de Jong, Managing Director at UFX.com says the ECB risks drawing the ire of the Germans with this decision:

"The ECB’s monetary policy has been backed up by encouraging results over the past year and it seems as though any change in direction will wait for another month at least.

“The call to bottom out rates isn’t without its critics. There are increasingly loud calls from Germany and various regional banks to end the era of cheap money and consistent QE with early signs of bubbles forming.

“However, it seems as though these won’t be strong enough for Frankfurt decision makers to change track with a buoyant Euro and growth figures continuing to impress.”

The ECB has confirmed it has left its three main interest rates unchanged.

The ECB warns quantitative easing can be increase in size and duration if the economic outlook worsens:

"Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim."

The Euro is steady with all eyes pointed at the accompanying statement and Q&A session at 13:30 B.S.T.

As far as markets concerned, #ECB desperately trying to sell dovish position while pursuing tighter monetary policy.

— Craig Erlam (@craig_forex) September 7, 2017

The Euro is seen edging higher ahead of a key European Central Bank policy decision.

Richard Kelly, Head of Global Strategy with TD Securities in London ascribes a 60% chance that the Euro will push higher following the media’s Q&A session with Draghi.

Kelly expects Draghi to rein back concern on higher EUR and links the rise to stronger growth, thereby signalling the gains are fundamentally warranted.

Draghi's comments on the Euro are expected to see the EUR/USD exchange rate push above 1.2070.

More details on Kelly's views here.

Sterling has been a passenger to external dynamics over the course of the past week. 

No surprise that the immediate direction in EUR/GBP will be derived from the ECB event.

"The key driver of the EUR/GBP cross will be the ECB meeting today. Given that we see general upside risks to EUR (as it will be difficult for the ECB to tame the EUR upside), the risks are skewed to EUR/GBP re-testing the 0.9200 level," says Petr Krpata at ING Bank N.V. in London.

Michael Snyed, Global Head of FX Strategy & Macro Quantitative Stratist at BNP Paribas:

“The ECB will likely struggle to talk down the EUR credibly at its monetary policy meeting

“We expect the European Central Bank to prepare the ground for an announcement in October that it will reduce its pace of asset purchases.

“The market holds extended long EUR positions heading into the meeting. However, we do not expect Draghi to aggressively talk down the EUR.

“And there are not yet clear signs that a stronger EUR is weighing on eurozone data.”