What have we learned from the ECB conference?

Summary:

• ECB left interest rates unchanged

• The Bank says Italian budget is fiscal not monetary discussion

• ECB does not see reasons to doubt in inflation

• EURUSD dropped to new weekly lows following the conference

The major market event of the day is already behind us. As expected the European Central Bank left interest rates unchanged today. The statement released along with the decision did not surprise investors either as we barely saw anything new in it. Key highlights from the statement:

• Interest rates will stay unchanged at least through the summer of 2019

• Interest rates will remain low as long as necessary

• Net asset purchase programme is likely to be terminated at the end of the year

• Termination of the net asset purchase programme will be dependant on incoming data

• The Bank expects future data to confirm the need of QE termination

• The Bank will reinvest maturing debt as long as necessary

As one can see neither language nor the key information in the statement has changed since the previous meeting. Having said that, investors turned their focus towards the press conference. The opening statement by the ECB President Draghi brought some interesting remarks. Namely, the ECB recognized the latest weaker than expected data but highlighted that it is still consistent with the baseline scenario. Additionally, Mario Draghi said that stimulus is still needed to boost price growth but the underlying inflation will pick-up towards the end of the year and will continue to rise over the medium-term being supported by the economic growth and expansionary policy. Central banker highlighted protectionism, emerging markets and turmoil on the financial markets as major risk factors. As usual the Q&A session turned out to be the most interesting part of the conference. Mario Draghi was asked numerous questions concerning issues surrounding the Italian budget and the draft rejection by the European Commission. The ECB President said that the Bank’s mandate is to keep inflation in check while the Italian problem is clearly fiscal in nature and therefore it is outside of the ECB’s scope of action. Draghi said that he is confident the agreement between Rome and Brussels will be reached. The Bank noted that the spillover from Italy to other markets has been limited so far. Ahead of the meeting some market participants wondered whether the Bank will consider extending the QE programme past the end of the year amid sluggish macroeconomic data but it turns out that the Governing Council did not even discuss such actions. Mario Draghi also said that what we are observing right now in Europe is not an economic downturn but a slowdown in growth momentum. In relation to Brexit Draghi said that the ECB is closely monitoring developments in deal talks. Last but not least, the ECB President claimed that the Governing Council did not discuss future monetary policy moves following the end of the net asset purchase programme.

EURUSD jumped substantially following Draghi’s words that there is no reason to doubt confidence in inflation but this gain was erased later on. Despite the conference being rather euro-positive the main currency pair is trading at weekly lows in the vicinity of the 1.1370 handle. The pair may be set to revisit 2018’s low a notch above the 1.1300 handle. Source: xStation5