(25 October 2019 ) DAILY MARKET BRIEF 2:Hawks could enjoy more sway as Draghi bows out

Mario Draghi gave his last press conference as president of European Central Bank (ECB) warning that Eurozone economic momentum was slowing. His tenure, which ends on the last day of this month, was marked by the use of unorthodox monetary policy to support the economy and markets, including a EUR 2.6 trillion bond purchase program and the reduction of policy rates into negative territory. Draghi doubled down on this approach six weeks ago by announcing a resumption of bond purchases and a rate cut to –0.5%. While Draghi leaves his post with inflation less than half the ECB's 2% target, his market scorecard has been largely positive.

Since he took over on 1 November 2011, he can claim a leading role in helping calm concerns over sovereign debt on Europe's periphery, with the 10-year Italian government bond yield down from 6.2% to today's 0.9%. Average returns on the Euro Stoxx 50 have been 10.2%, versus 2.9% under predecessor Jean-Claude Trichet (2003–2011) and –3.2% under Wim Duisenberg (1998–2003).

But it remains to be seen whether Draghi's dovish course will continue under his successor Christine Lagarde, and any reduction in monetary support would have important implications for investors.

While Lagarde's statements suggest she is just as dovish as Draghi, saying in August that ECB policymakers must be ready to act to protect the economy, she is also considered a consensus builder. That tendency could give greater influence to move hawkish ECB policymakers. French central bank president Francois Villeroy said late last month that he was "not in favor of the resumption of net asset purchases at this time," considering it "unnecessary." Dutch central bank chief Klass Knot said the recent policy moves were "disproportionate" and called into question the effectiveness of the policies, while Austrian central bank governor Robert Holzmann hinted that Draghi had made a mistake. Finally, Bundesbank's Jens Weidmann suggested that Draghi had "overstepped the mark" at a time when the "economic situation is not all that bad." With plenty of ECB policymakers skeptical of Draghi's approach, it could take Lagarde a year or more to gain traction.

There has also been some sign of questioning of the dovish approach on the Eurozone's doorstep, with Sweden's Riksbank saying it planned to put an end to negative rates despite continued signs of economic weakness. Governor Stefan Ingves said that although negative rates had helped cope with the aftermath of the financial crisis, he warned that risks would increase if the policy became entrenched and that many people considered the policy "strange." The Riksbank has said it sees the repo rate returning to zero by the end of the year, from –0.25% at present.

So, we believe the course for monetary policy is far from certain as the Draghi era draws to a close. Even a modest shift away from dovishness would increase our confidence in our positive outlook for EURUSD, which we expect to rally to 1.17 by the third quarter of 2020. A moderating degree of dovishness would also represent a setback for Eurozone peripheral sovereign bonds and high yield corporate credit.