Draghi addressed the press and delivered the ECB’s latest rate decision on Thursday in Frankfurt. Markets had hoped for a continuation of the ECB’s bond buying stimulus would be announced. Therefore, markets were left stunned when the head of the ECD announced that a reduction of asset purchasing from €80Bn to €60BN will be implemented as of April. Following the announcement that the ECB would be amending the bond buying program the Euro weakened significantly.
Whilst interest rates were expected to remain at 0% and deposit rates also weren’t anticipated to move, Draghi did comment that the latter would receive more scrutiny in the new year.
Many were startled and had in correctly predicted that the asset purchasing program would have been left untouched this year. Instead Draghi served up a ‘tapering light’ cutting purchasing yet adhering to the asset purchasing program until the end of 2017. Many criticized the move and markets found themselves in light tailwind.
Right or wrong to not taper?
Whilst many will perceive the gradual reduction in asset purchases as a morphed form of tapering. Draghi justified the move to the markets and openly voiced concerns relating to the Eurozone’s growth stating that they were ‘tilting to the downside’. This lack of growth combined with the stagnant inflation figure of 0.8pc will have unquestionably been two of the main motivations for slowly taking away the cushion of asset purchasing.
Furthermore, much of his rationale will also be guided by the strong potential of an interest rate hike in the US and this month’s announcement will be viewed as many as a delay tactic. In order to analyse and buy to time in order to see how markets react to any potential US changes.
Eurozone Inflationary concerns
As mentioned above inflation in the Eurozone has remained stagnant registering 0.8%. During Draghi’s speech the ECB delivered its own set of inflation forecast whereby it predicted that the Eurozone community would experience inflation of just 1.3% next year, 1.5% in 2018 and 1.7% in 2019. Draghi was clear that persistence would be required for the figure to get in line with the ECB’s inflation target. No doubt that as the ECB gradually meets its inflationary targets it will also be less reliant on it Quantitative easing programs.
How currency markets reacted
During the announcement in Frankfurt Draghi initially mentioned that ECB would continue is asset purchasing program and originally the GBP/EUR fell to a day low of 1.1660 before spiking to the height of the day 1.1871, following his admission that the ECB would be amending the bond buying program the Euro weakened significantly
.
EUR/USD reacted in a similar fashion recording a day low of 1.0595 and a high of 1.0873, devaluing 1.28% over the trading session. Closing the week on 1.055.
It would therefore be completely rational to think that with the continued strength of the US economy and extremely likely hood of a rate rise. Added with the uncertainty both economic and political in the Eurozone that the EUR/USD could well be heading toward parity in the next quarter.
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