Unsurprisingly the European central bank has held its rates steady yesterday at 0% for 17th consecutive month. The ECB meeting took place against a backdrop of strengthening of the single currency. The EURUSD pair has reached 1.16 for the first time in two years.
ECB President Mario Draghi appeared dovish, certainly in an effort to calm down financial markets and the euro appreciation. Markets did not buy it and they still believe that further tightening are on the roadmap and this sentiment is largely boosting the Eurodollar.
While he mentioned in June that the ECB monetary policy would follow the Eurozone recovery, which had already been interpreted as hawkish by markets at the time, he appeared yesterday concerned about the Eurozone inflation path. He mentioned that the current QE could be increased. In other words, a larger volume of bonds could be purchased and with larger duration.
In our view, this is unlikely. We believe that the bonds scarcity in the markets would prevent such a possibility and Draghi’s verbal intervention was more of an attempt to devalue the euro. At next September meeting will be discussed the bonds purchase and it is clear that the program will be held unchanged until its term in December just because the ECB cannot increase it. The single currency is definitely on its way up.
By Yann Quelenn