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The ECB Event: Euro Exchange Rate Moves and Analyst Reactions

Mario Draghi and the Euro

Coverage of the European Central Bank's April 26 policy announcement and press conference with the foreign exchange market reactions and analyst insights.

Agenda:

12:45: No change to rates, statement unchanged

13:30: Media briefing

Watch the press conference live here:

 

The European Central Bank have announced interest rates and additional policy settings are to remain unchanged following the latest policy meeting, however the overall tone struck in the ensuing press conference was something of a relief for the Euro which had been under pressure over recent days.

Movement in the Euro has been volatile in the wake of the event, so we are yet to really draw a firm conclusion as to what currency markets make of the event.

The ECB confirm they will keep interest rates at present levels well past the ending of the asset purchase programme (quantitative easing), currently tipped to end towards the end of the tear. This suggests the ECB remains on track to raise interest rates from mid-2019 onwards.

The crux of the event was however always going to be on the tone struck by ECB President Mario Draghi during the press conference. Draghi acknowledged data, "points to some moderation, while remaining consistent with a solid and broad-based expansion of the Euroarea economy."

Inflation is on track to hit the 2% target over the medium-term while short-term measures of underlying inflation remain subdued and are yet to show signs of a sustained upward trend.

Developments in the exchange rate with regards to inflation will continue be watched closely, however Draghi has confirmed that the Euro is not at the current time a pressing issue, suggesting it drew little attention in the meeting. No doubt, the recent slippage in the value of the Euro is something the ECB has welcomed.

In light of the above, Draghi maintains a sustained stimulus remains required to help inflation push higher over the medium-term.

Importantly, Draghi appears to be sticking to the base-case expectation that the economic recovery will extend, despite recent soft data.

The Euro has been volatile with markets taking their time to digest the message, or more aptly in this case, the non-message.

"The ECB didn’t actually do much this Thursday – and that was maybe the problem. Draghi’s typically cautiousness post-meeting address seemed to upset the Euro, specifically his claim that the central bank ‘didn’t discuss monetary policy per se’,  to instead focus on the topic of the Eurozone’s recovery and how ‘broadly all countries experienced... some moderation in growth or some loss of momentum’ in the last month. The currency is clearly frustrated with the ECB’s lack of clarity in signalling whether or not its bond buying scheme will end before the year is over," says Connor Campbell, an analyst with Spreadex.

The Euro-to-Pound exchange rate has moved from a weekly high of 0.8775 to 0.8689 at the time of writing, the inverse being the Pound-to-Euro rate is up from a weekly low at 1.1396 to 1.1502:

Pound moves higher against the Euro

The EUR/USD exchange rate has slid from a weekly high of 1.2270 to 1.2120 at the time of writing:

EUR-USD

 

Tim Riddell, Macro Strategist with Westpac in London says the Euro's decline following the press conference is more than anything the market's decision to resume prior trends.

"EUR/USD started to slide after the conclusion of the meeting as markets resumed to their trends of this week," says the analyst.

We do find this explanation more plausible, owing to the lack of substance delivered by the meeting.

"EUR crosses thus look vulnerable, particularly against GBP, where real yield convergence should keep EUR/GBP trading lower," says Hans Redeker, chief strategist at Morgan Stanley who had cited Sterling as being a likely beneficiary of the ECB event.

During the press conference we actually saw the Euro recover somewhat, and were resigned to the fact that a massive move in the Euro in either direction was unlikely on the delivery of a more-or-less even message.

"So EUR over the first hurdle," says Viraj Patel, an analyst with ING Bank. "President Draghi says that recent moderation in EZ data is (1) a pullback from high levels and (2) due to temporary factors. ECB chief says overall Eurozone growth outlook solid and broad-based."

There were concerns that Draghi would signal concern that the loss in economic momentum was suggestive of a Eurozone-specific problem. Rather, the blame for slowing output is seen as being consistent with global conditions.

However, Nish Parekh, Senior Trader with Silicon Valley Bank warns that economic headwinds may cause unexpected delays in tapering and tightening monetary policy in the near-term, "which would create further divergence in rate differentials, leaving more of a gap for the ECB to cover and will negatively impact EUR."

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