Mario Draghi sent the euro much higher yesterday after his speech at the European Central Bank Forum. Markets felt relieved especially after his dovish comments a few weeks ago when he declared that the Eurozone still needed ECB stimulus.
Draghi made also some comments about inflation, which is below target, and that should remain soft for some more time despite ongoing improvement.Recently pressures were adding up on the ECB’s shoulders to tighten its monetary policy, especially since the Fed has twice raised rates this year already. Major drawbacks preventing the European institution to do so were mostly the modest economic growth and political uncertainties. Those elements are now not centre stage any more, particularly since the election of Emmanuel Macron in France.
Yesterday, the euro went over 1.1300 for the first time in nine months. The ECB President showed its optimism by stating that the Eurozone recovery is progressing and that the current monetary policy stance must accompany this recovery. That sounded hawkish but we consider it was not. Mario Draghi did not explicitly talk about tightening but about “parameters adjustment”. Markets interpreted that comment as a hint about further tightening. We rather believe this actually leaves the door open for a continued ultra-loose monetary policy.
By Peter Rosenstreich