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5 Main Takeaways from ECB Press Conference (by Kathy Lien):
While investors sold euros after the European Central Bank’s monetary announcement and press conference, the single currency did not fall to fresh lows against the U.S. dollar. Nothing Mario Draghi said was particularly surprising but a few important takeaways explain why today’s speech was more bearish than bullish for the EUR/USD:
1. ECB is Getting Serious about ABS purchases – Mario Draghi said the ECB intensified preparatory work related to outright purchases of asset-backed securities (ABS), which indicates that they are still looking to increase stimulus. They will be hiring a consultant and focusing their efforts on a simple and transparent program and they want to be ready to take action regardless of what ABS regulators say.
2. Draghi Says ECB and Fed Rates will Diverge for a Long Time – Draghi also reminded everyone that ECB and Fed rates will move in opposite directions for a long period of time. Considering that the Fed is gearing up to end Quantitative Easing and raise interest rates next year this can only mean that the ECB has no immediate plans to reduce stimulus or raise interest rates.
3. ECB is Worried about Geopolitical Risks – The ECB is growing concerned about the economic impact of geopolitical tensions. This morning, Russia banned food imports from the European Union in reaction to the financial sanctions announced by the EU last month. While it is too early to tell what the exact implications will be, Russia is the world’s 5th largest food importer. The prospect of rising energy prices is also a worry but right now crude is on a downtrend and not an uptrend.
4. ECB Waiting for June Stimulus Package to Hit the Economy – There is very little reason for the ECB to rush into announcing a raft of new measures when many of the programs introduced in June have yet to be implemented. The first Targeted LTRO is not being run until September with the second expected in December. The central bank is confident that these measures will provide sufficient support for the banking sector and the economy but they won’t know how successful the program is until the end of the year.
5. ECB Sees Recovery as Moderate and Uneven – The central bank is still not happy with the pace of recovery. While they expect the moderate recovery to continue, unemployment remains high with a sizeable amount of unutilized capacity. Inflation expectations may be broadly balanced but there are downside risks to the economy.
What to Expect Next Week
The Central banks are done for a while, but the market will get to hear from Carney midweek. The BoE will publish its forecasts for growth and inflation and investors will be looking for clues on the timing for the U.K.'s first post-crisis rate hike. Aussie business confidence data will kick-start the week down-under, while the German ZEW economic sentiment will open the European session. Ahead of U.S. consumer sentiment rounding out the week, the market gets a peek at U.S. consumer appetite from its retail sales data.
While investors sold euros after the European Central Bank’s monetary announcement and press conference, the single currency did not fall to fresh lows against the U.S. dollar. Nothing Mario Draghi said was particularly surprising but a few important takeaways explain why today’s speech was more bearish than bullish for the EUR/USD:
1. ECB is Getting Serious about ABS purchases – Mario Draghi said the ECB intensified preparatory work related to outright purchases of asset-backed securities (ABS), which indicates that they are still looking to increase stimulus. They will be hiring a consultant and focusing their efforts on a simple and transparent program and they want to be ready to take action regardless of what ABS regulators say.
2. Draghi Says ECB and Fed Rates will Diverge for a Long Time – Draghi also reminded everyone that ECB and Fed rates will move in opposite directions for a long period of time. Considering that the Fed is gearing up to end Quantitative Easing and raise interest rates next year this can only mean that the ECB has no immediate plans to reduce stimulus or raise interest rates.
3. ECB is Worried about Geopolitical Risks – The ECB is growing concerned about the economic impact of geopolitical tensions. This morning, Russia banned food imports from the European Union in reaction to the financial sanctions announced by the EU last month. While it is too early to tell what the exact implications will be, Russia is the world’s 5th largest food importer. The prospect of rising energy prices is also a worry but right now crude is on a downtrend and not an uptrend.
4. ECB Waiting for June Stimulus Package to Hit the Economy – There is very little reason for the ECB to rush into announcing a raft of new measures when many of the programs introduced in June have yet to be implemented. The first Targeted LTRO is not being run until September with the second expected in December. The central bank is confident that these measures will provide sufficient support for the banking sector and the economy but they won’t know how successful the program is until the end of the year.
5. ECB Sees Recovery as Moderate and Uneven – The central bank is still not happy with the pace of recovery. While they expect the moderate recovery to continue, unemployment remains high with a sizeable amount of unutilized capacity. Inflation expectations may be broadly balanced but there are downside risks to the economy.
What to Expect Next Week
The Central banks are done for a while, but the market will get to hear from Carney midweek. The BoE will publish its forecasts for growth and inflation and investors will be looking for clues on the timing for the U.K.'s first post-crisis rate hike. Aussie business confidence data will kick-start the week down-under, while the German ZEW economic sentiment will open the European session. Ahead of U.S. consumer sentiment rounding out the week, the market gets a peek at U.S. consumer appetite from its retail sales data.
