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Draghi Says ECB Forward Guidance May Help to Curb Euro
European Central Bank President Mario Draghi said his forward guidance may help to weaken the euro and lower real interest rates, easing the risk that inflation won’t return to the goal set by policy makers.
Guidance “creates a de facto loosening of policy stance, as real interest rates are set to fall over the projection horizon,” Draghi said in Vienna yesterday. “At the same time, the real interest-rate spread between the euro area and the rest of the world will probably fall, thus putting downward pressure on the exchange rate, everything else being equal.”
Draghi’s comments add to those after last week’s monetary-policy meeting when he said a strengthening euro since 2012 has kept consumer prices subdued. While the exchange rate isn’t a policy target for the ECB, Draghi said that the currency’s level is becoming “increasingly relevant in our assessment of price stability.”
The euro has gained about 6.6 percent against the dollar in the past year and is up 6.9 percent against a basket of developed-market peers. The currency fell today after declining 0.3 percent yesterday following Draghi’s remarks. It had reached $1.3967 earlier in the day, the highest level since October 2011.
Economists are split on whether the ECB would act to prevent the euro from strengthening, according to the Bloomberg Monthly Survey published yesterday. Twenty-one of 40 respondents said the ECB would interfere, while 20 said they wouldn’t, according to the survey carried out March 7-12.
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EUR/USD pushes higher after disappointing U.S. data
The euro pushed higher against the U.S. dollar on Friday, as the release of disappointing U.S. data weighed on demand for the greenback, although sustained concerns over Ukraine and China were expected to limit gains.
EUR/USD hit 1.3936 during U.S. morning trade, the session high; the pair subsequently consolidated at 1.3923, gaining 0.40%.
The pair was likely to find support at 1.3843, the low of March 12 and resistance at 1.3966, Thursday's high and a two-and-a-half year high.
In a preliminary report, the University of Michigan said its consumer sentiment index fell to 79.9 this month, from a reading of 81.6 in February, confounding expectations for a rise to 82.0.
The report came after official data showed that U.S. producer price inflation fell 0.1% in February, confounding expectations for a 0.2% rise, after a 0.2% increase the previous month.
Core producer price inflation, which excludes food, energy and trade, slipped 0.2% last month, compared to expectations for a 0.1% rise, after a 0.2% gain in January.
Meanwhile, investors remained cautious after Russia launched new military exercises near its border with Ukraine on Thursday, showing no sign of backing down on plans to annex Crimea.
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EUR/USD: What Is The Level That Could Really Trigger ECB Easing? - BTMU
The euro has pared some its recent gains overnight following comments from ECB President Draghi on the strengthening of the effective euro exchange rate and how this had a significant impact on current levels of inflation and price stability.
In this regard, Bank of Tokyo-Mitsubishi UFJ (BTMU) thinks that Draghi's comments are not a game changer for the EURarguing that the ECB’s staffs’ average forecast for inflation in 2016 is already low at 1.5%, and this already signals that a further significant strengthening of the euro would likely trigger additional ECB easing by increasing the likelihood that inflation undershoots their target.
"In the near-term such euro specific rhetoric from the ECB may help to dampen further euro upside momentum although it is unlikely to prevent further gains. The EUR/USD rate may be able to rise towards the 1.45-level before triggering further ECB easing which would weigh more heavily upon the euro," BTMU projects.
"ECB President Draghi remains optimistic that the ECB’s forward guidance will over time place downward pressure upon the euro as the real interest rate spread between the euro area and the rest of the world will probably fall. However, in the near-term the ongoing shrinking of the ECB’s balance sheet continues to support a stronger euro making ECB monetary policy appear relatively tight," BTMU adds.
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EUR/USD Forecast March 17-21
EUR/USD had a successful week, rising to a new 2+ year high, overcoming obstacles.. Where is it headed now? Inflation data, Weidmann’s speech, German ZEW Economic Sentiment and EU Economic Summit are the main market-movers. Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.
It seemed like smooth sailing for the common currency: fears about China didn’t really hurt it, and some global optimism sent the pair to a two year high. Yet all this didn’t last: when Draghi opened his mouth and tensions rose in the Russia – Ukraine conflict, the euro took a hit but eventually staged an impressive recovery to high ground. Can the euro break above 1.40 or is this already too much?
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Europe Week Ahead: EZ HICP Inflation, Ger Zew, BoE Minutes, UK Budget, -Employ
We expect February Eurozone inflation to come out at 0.7% YoY (consensus 0.8%, January 0.8% YoY), implying a 0.1% downward revision to the flash estimate released by Eurostat at end-February. Such an adjustment is necessary – in our view – for consistency reasons between national data released so far and the whole Eurozone figure. This very weak number is largely explained by low energy prices (below −2% YoY), while core inflation is close to 1% YoY. Eurozone inflation should be very weak again in March (around 0.6-0.7% YoY in our view), before recovering towards 1% in the second quarter on the back of a less negative contribution from energy (base effects mainly).
The German ZEW index has been struggling to regain momentum, as reflected in last month's small decline in expectations. Given renewed concerns over a less supportive external environment, risks in the Ukraine and China, we believe a further downward adjustment in ZEW expectations is likely this month, although current conditions should improve at the same time. The ZEW has generally been a poor predictor of the level of GDP growth anyway, but any downside surprise would highlight the difficulty for the German economy to re-accelerate from here, especially if foreign demand continues to slow down.
On 19 March, Chancellor Osborne will present the UK Budget for fiscal year 2014/15, alongside the Office for Budget Responsibility’s (OBR) bi-annual Economic and Fiscal Outlook. While changes to fiscal policies are likely to be limited, the main point of interest will be on the revisions to the economic and fiscal forecasts. They will reflect better-than-expected actual GDP data and the improvement in prospects for activity and tax receipts. The OBR is likely to revise further to the upside its growth forecasts, while lowering its borrowing forecasts. We expect growth forecasts to be brought close to consensus estimates at 2.7% and 2.4% for 2014 and 2015 respectively from 2.4% and 2.2% in the December’s forecasts. The OBR had expected that underlying borrowing (excluding Royal Mail and APF transfers) would fall from GBP115bn (7.3% of GDP) in FY2012/13 to 111.2bn (6.8% of GDP) in FY2013/14 and GBP96bn (5.6% of GDP) in FY2015/16. With only two months missing from FY2013/14, underlying borrowing is already GBP4.0bn less than it was in the same period last year (0.2% of GDP). We expect underlying borrowing in FY203/14 to come in around 110bn, implying a slight undershoot relative to previous forecasts. The OBR will likely take a conservative view about the nature of the recovery by saying that most of the improvement in growth and fiscal metrics is cyclical rather that structural. The fiscal mandate will therefore likely show only minor positive revisions, but high enough to bring the cyclically adjusted balance on the current budget into surplus territory a year earlier than expected previously (2016/17 instead of 2017/18). Nevertheless, net debt as a % of GDP will likely stabilise in 2016/17, still short of the supplementary target.
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EUR/USD weekly outlook: March 17 – 21
The euro ended the week close to two-and-a-half year highs against the dollar on Friday, one day after European Central Bank President Mario Draghi said the strong euro was dragging down inflation in the euro area.
EUR/USD was up 0.33% to 1.3913 at the close, holding below Thursday’s peaks of 1.3966, the strongest level since October 31, 2011.
The pair was likely to find support at 1.3844, Thursday’s low and resistance at 1.3966.
The euro lost ground against the dollar and the yen on Thursday after the ECB chief said the strong euro was putting downward pressure on euro zone inflation.
Draghi said the strength of the euro was becoming increasingly relevant to the bank’s assessment of price stability, pointing to growing concerns that the appreciation of the euro could undermine the fragile recovery in the euro area.
The euro has rallied as expectations for further monetary easing by the ECB dimmed after the bank refrained from tightening policy at its meeting earlier this month, saying economic conditions did not support such a move.
Meanwhile, tensions between Russia and the West remained high ahead of Sunday's referendum in Ukraine’s Crimea region, now controlled by pro-Russian forces, on whether citizens want to join Russia.
The referendum has been condemned as "illegal" by Kiev and the West and is expected to prompt the west to impose sanctions on Russia.
Investors also remained wary after weak economic reports from China raised fresh concerns over the strength of the world’s second-largest economy. On Thursday, Chinese Premier Li Keqiang warned that the economy faced "severe challenges" in 2014.
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EUR/USD edges lower ahead of E.Z. inflation data
The euro edged lower against the U.S. dollar on Monday, as markets were eyeing euro zone inflation data to be released later in the day, while comments by European Central Bank President Mario Draghi last week continued to weigh.
EUR/USD hit 1.3897 during late Asian trade, the session low; the pair subsequently consolidated at 1.3894, slipping 0.14%.
The pair was likely to find support at 1.3834, the low of March 11 and resistance at 1.3966, the high of March 13 and a two-and-a-half year high.
Demand for the single currency remained under pressure after ECB President Mario Draghi said on Thursday that the strong euro was putting downward pressure on euro zone inflation.
Draghi said the strength of the euro was becoming increasingly relevant to the bank’s assessment of price stability, indicating growing concerns that the appreciation of the euro could undermine the fragile recovery in the euro area.
Meanwhile, the greenback was also vulnerable after a preliminary report on Friday showed that the University of Michigan's consumer sentiment index fell to 79.9 this month, from a reading of 81.6 in February, confounding expectations for a rise to 82.0.
Data also showed that U.S. producer price inflation fell 0.1% in February, confounding expectations for a 0.2% rise, while core producer price inflation, which excludes food, energy and trade, slipped 0.2% last month, compared to expectations for a 0.1% rise.
Elsewhere, over 90% of Crimean voters on Sunday chose to break with Ukraine and join Russia. U.S. President Barack Obama said Washington rejected the results of the referendum and warned that the U.S. was ready to impose sanctions on Moscow.
The euro was fractionally lower against the pound, with EUR/GBP edging down 0.08% to 0.8350.
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Euro-zone inflation rate revised down to 0.7%
The euro zone's annual rate of inflation was lower in February than first estimated, and fell back to the level reached in October 2013 that prompted the European Central Bank's last effort to stimulate growth.
The European Union's statistics agency Monday said consumer prices in the 18 nations that share the euro were 0.3% higher than in January, and 0.7% higher than in February 2013. Eurostat last month estimated that the annual rate of inflation was unchanged at 0.8% in February.
The revision means that inflation dropped further below the ECB's target of just under 2.0%, and to its lowest level since October of last year. Responding to that figure in early November, the ECB cut its benchmark interest rate to a record low of 0.25% from 0.5%, its last policy move.
ECB policy makers have repeatedly said they don't expect outright declines in consumer prices, known as deflation. They reject comparisons with Japan, which struggled with deflation for two decades, saying the ECB has acted more decisively than Japan did in the 1990s and that European banks are stronger.
But they have acknowledged that very low rates of inflation are a worry, and in recent weeks have focused on the role of an appreciating euro in pressing down on import prices and activity.
ECB President Mario Draghi Thursday issued his strongest statement yet that the strong euro is pulling down inflation in the euro zone, making clear that the central bank is concerned that the appreciating euro could undermine the currency bloc's fragile recovery.
"The strengthening of the effective euro exchange over the past one-and-a-half years has certainly had a significant impact on our low rate of inflation and, given current levels of inflation, is therefore becoming increasingly relevant in our assessment of price stability," Mr. Draghi said.
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Crimean Referendum threatens Europe’s Economic Balance
Sterling continued to lose ground against most currency pairs last week following the domestic account deficit data and concern regarding the events unfolding in Crimea. Global Stock markets are struggling and due to the Pounds relationship with stocks, the upheaval has seen GBP firmly on the back foot. The referendum in Crimea could also have far-reaching economic and political implications that disturb the political balance in Europe and further afield.
The account deficit is also causing problems. According to the ONS the trade gap widened from £7.7Bn in December to £9.8Bn in January, and has BoE representatives concerned which has lead to a flailing Pound.
This week BoE Governor Carney speaks on Tuesday, which has the potential for considerable volatility. But the real movement is likely be seen on Wednesday, when 4 largely influential pieces of data are released at the same time, namely Claimant Count Change, MPC Asset Purchase Facility Votes, MPC Official Bank Rate Votes and the Unemployment Rate
The Euro continued to gain ground against the US Dollar and Sterling last week, following the powerhouse German consumer price index, which printed a rise of 0.5% in February. Employment in the Eurozone and the European Union as a whole also rose 0.1% in Q4 2013, which immediately saw the single currency appreciate and stands the Euro in good stead moving forward. This week the all-important German ZEW economic sentiment on Tuesday will give insight into the economic health of the Eurozone’s largest economy. This will give an indication of sentiment that will govern future economic activity and fundamentally the strength of the Euro moving forward.
Today however the Euro rate will be governed by the CPI y/y, which is considered the Eurozone’s most influential inflation data and is used to assess the central bank’s own inflation target.
The US Dollar continued its downfall last week following disappointing macroeconomic reports, which have lead to doubts that the FED will continue its quantitative easing tapering or even pause stimulus programmes all together until economic growth becomes more sustainable. The university of Michigan consumer confidence index surprisingly fell from 81.6 to 79.9 this month alongside the producer price index, which fell 0.1% in February against the expected 0.2% rise. This puts pressure on the US Dollar moving forward, and market participants are waiting anxiously for the next FED meeting to determine strategies policy makers will adopt moving forward.
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Euro zone inflation drops back to rate-cut level
Euro zone annual inflation dropped back in February to the level that triggered a surprise cut in interest rates in November, revised data showed on Monday, underlining deflation risks in the bloc.
The year-on-year inflation rate in the 18 countries sharing the euro was 0.7 percent in February against 0.8 percent in January, the European Union's statistics office Eurostat said.
The reading was the joint-lowest in four years and a touch below the initial February estimate of 0.8 percent. The annual inflation print last fell to 0.7 percent in October - a decline that persuaded the European Central Bank to cut its key interest rate to a record low of 0.25 percent the following month.
Inflation has not dropped below that level since November 2009, when it stood at 0.5 percent, Eurostat said.
The ECB, which targets inflation at close to but below 2 percent, considers the risk of euro zone deflation as "quite limited", its president Mario Draghi said last Thursday. The bank left borrowing costs unchanged at its most recent meeting on March 6.
Draghi also said the bank has been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging.
LOW INFLATION 'THE NEW NORMAL'?
But the ECB has already said it expects inflation to only pick up slowly, to 1.0 percent this year and 1.5 percent in 2016, and a minimal dip to 0.7 percent last month seems unlikely to prompt a significant policy change.
"The downward revision to the February inflation figures is unlikely to be enough to trigger further near-term monetary easing," said Martin van Vliet, senior economist at ING. "This will also require a deterioration of the activity and or a further significant strengthening of the euro."
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