Draghi Sticks to Script

The euro went bid in response to the ECB meeting and Draghi’s seeming optimism.  The staff shaved the GDP forecasts for this year and next while keeping inflation forecasts steady.  Risks were seen as broadly balanced.  

 

The ECB did not surprise the market.  The plan to halve the asset purchases in Q4 before stopping at the end of the year was reiterated.  In the economic assessment, ECB President Draghi sounded a bit more optimistic, and this, coupled with the decline in the US headline and core rates of CPI saw the euro rise to new highs for the month (~$1.1685).

The ECB staff did shave its GDP forecast this year and next.  In March, the staff forecast this year’s growth at 2.4% and this was cut to 2.1% in June and was pared to 2.0% today.  Next year’s growth was projected at 1.9% in March and June.  It was lowered to 1.8% today.  Growth forecasts on for 2020 were left unchanged at 1.7%.  The staff left its inflation forecasts unchanged at 1.7% throughout the forecasting period.

Draghi identified risks coming from rising protectionism, emerging markets, and financial market volatility. Nevertheless, he reiterated that the risks to growth are broadly balanced.  There was little recognition of the recent high-frequency data, especially from Germany and Italy, that badly missed expectations. He also emphasized the continued improvement in the labor market and rising wages.

After the asset purchases end, the next focus is on the reinvestment of the maturing proceeds.  Draghi said a discussion by the Board has not been held yet, but will by the end of the year.  He reiterated that the capital key will remain central.

The euro is moved above the 100-day moving average (~$1.1680) for the first time since late April.   Additional resistance is seen the $1.1700-$1.1730 band.  Draghi’s less cautionary tone is putting at risk the recent pattern in which the euro has fallen the past seven ECB meeting sessions.    A move below $1.1640 would neutralize the technical tone.