Euro Charges higher as Draghi sets October for tapering talk
City Index September 7, 2017 5:00 AM
If Draghi’s aim was to talk down the euro at today’s press conference, the market wasn’t listening. Since Draghi took to the stage the euro rallied over 1% versus the dollar charging back through $1.30 to a high of $1.3059, almost matching late August’s 2 ½ year high
If Draghi’s aim was to talk down the euro at today’s press conference, the market wasn’t listening. Since Draghi took to the stage the euro rallied over 1% versus the dollar charging back through $1.30 to a high of $1.3059, almost matching late August’s 2 ½ year high.
What caused the euro rally?
The ECB increased its economic growth outlook to 2.2% in 2017, from 1.9% whilst forecasts for 2018 remained at 1.8% and 2019 remained at 1.9%. Meanwhile inflation forecasts were revised downwards in 2018 to just 1.2%, some way from the central bank’s target rate of 2%. The reason for the revised down inflation forecast was placed on the strength of the euro. The previous projections had been made with the euro at €1.08, today’s projection were based on the euro at €1.18.
Yet instead of focusing on the strength of the euro, Draghi opted to discuss in more detail his confidence in the eurozone recovery. His expression of confidence in the broad based, robust and solid recovery of the eurozone, far outweighed any discussion of euro strength and its impact on preventing the ECB reaching policy goals.
First discussions of tapering
The fact that the ECB have finally started to discuss the winding down of QE also supported the euro. Discussion were very preliminary, but the market was just relieved to know that they have started. October still looks to be the month when more information will come regarding the winding down of the bond buying programme and that actually makes sense. By October the German elections will be out of the way, the Federal Reserve will have met and there will also be another month of economic data to support a decision. And investors were happy to focus on just that – tapering to be discussed next month and no real talk down of the euro.
Could the tapering plan disappoint or will the euro just be happy that QE is on its way out?
There is a good chance that the tapering process will be a much longer slower process than what the market maybe hoping for. Whilst the ECB only has a single official mandate, price stability, it could be argued that there is an unofficial mandate which looks at the labour market. Inflation is still a long way from the 2% target, and unemployment in the eurozone remains at 9.3%, elevated when compared to other areas which are on a path of tightening monetary policy, such as the US at 4.4%. The ECB is confident that the recovery will continue to drive jobs growth and tighten the labour market and eventually drive inflation higher. However, patience is needed and the process of tightening in the labour market is taking longer than central bank had hoped. Draghi reiterated the that a substantial degree accommodation was still required.6 million jobs have been created since the stimulus programme began in 2013, yet unemployment in the eurozone remains high but inflation stubbornly low. There is a good chance that the ECB will look to hold onto this bond buying programme until unemployment starts to fall lower boosting inflation which could be a very long time off. Whilst discussion over the tapering of the QE have started, the news coming in October may not be quite what the market is hoping for, which may put some brakes on the euro rally
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