ECB recap

There was so much fuss made about this key ECB meeting and it ended up being a bit of a damp squib. The central bank and its president Mario Draghi delivered contradictory statements about inflation and probably left many market participants feeling somewhat disappointed that there wasn’t anything concrete announced. To be fair, the leaked inflation and growth forecasts earlier this week had already taken the edge out of this meeting and many people had already prepared to hear a more dovish than a hawkish ECB. Hence, the euro didn’t exactly fall off a cliff.

As expected, the European Central Bank left its monetary policy unchanged. The only notable change it made in its statement was to drop the reference to "or lower" in the forward guidance. According to the latest policy statement, the Governing Council expects “the key ECB interest rates to remain at their present ~~or lower~~ levels for an extended period of time, and well past the horizon of the net asset purchases." There was no mention of tapering QE.

But the focus was always going to be on Mario Draghi at the ECB press conference. There had been speculation that the ECB President would start preparing the market about the prospects of tapering its massive QE stimulus programme at this meeting due to the recent improvement in Eurozone data and increased pressure from Germany, where several officials including Chancellor Angela Merkel have recently called for tighter ECB monetary conditions.

However, Mario Draghi poured cold water over those expectations. In a way, though, the slight change in tone in the statement was a baby step in preparing the market for potentially tighter monetary conditions in the future. Draghi did say that the euro zone growth risks were now "broadly balanced" as opposed what he had said previously, namely that the risks were to the downside. What’s more, ECB policymakers are increasingly confident that inflation in the eurozone will reach its target level “in a durable way.” Yet, that’s despite the fact the bank cutting its inflation forecasts.

In short, the ECB left the markets with very little to latch on, and appeared a little more dovish than expected. The euro fell in response, but it wasn’t a massive move. As a result, the EUR/USD could actually drift back higher.

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