Draghi s hawkish surprise gives euro a boost but can it last

ECB President Draghi is once again the king of curveballs. After delivering what was arguably a dovish statement early on in his press conference, and clearly stating that for the ECB’s GDP and inflation forecasts are conditional on the implementation “of all our policy measures”, Draghi displayed a more hawkish tone during the Q&A.

The key takeaway from this month’s ECB meeting appears contradictory: QE is here to stay in the Eurozone, until at least the end of this year. However, more policy action is less likely because deflation risks have receded. Reading between the lines suggests that the next change from the ECB will be towards removing accommodation and not adding it.

The two faces of Draghi

“Why didn’t the ECB just say that,” I hear you cry. Well, if Draghi had been that blatant, then volatility would have surged, something that the ECB likely wants to avoid. Instead, an opaque reference to the ECB’s slightly less dovish stance was needed to control the market reaction. Even though the EUR rose on the news, it is only up 60 pips so far, and likewise, German bond yields are only 3 basis points higher. Thus, Draghi managed to get his less dovish message across, but the market impact has, so far, been contained.

Are we in a post-policy era for central banks?

Ahead of this press conference I had suggested that central banks were in a post-inflation era; by this I meant that rather than prevent inflation, central bank policy is now happy to look through periods of rising prices if tighter policy threatens growth. However, in this press conference Draghi managed to sound concerned about inflation – Eurozone inflation expectations have risen sharply in the last three months to their highest level since 2015 – yet he was utterly unwilling to bring an early end to the ECB’s QE programme. Therefore, are we in a post-policy environment, where Draghi doesn’t have to change policy to get his less dovish message across?

The market reaction

The market reaction to Draghi’s comments has been fairly bullish, European stocks are a touch higher this afternoon, as are Eurozone bond yields. EUR/USD managed to ticked above 1.06 and EUR/JPY is at its highest level since early February, as Draghi started to talk. It is worth watching the euro’s close on Thursday to see if Draghi’s hawkish curveball will sustain euro gains, or if the euro starts to fade as the market re-focuses on the ECB’s commitment to fulfilling its full QE programme. We are definitely entering an interesting era for the major central banks.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.