Three Things Draghi Might Do To Bring Euro Down

The ECB Governing Council meeting would have been a pure boredom with no recent appreciation of EUR. The ECB has just launched it a reduced version of asset purchasing at the beginning of 2018 as it said it will be buying only €30 billion monthly with the program conditionally ending in September this year. With the latest release on ECB accounts, or minutes from its December Governing Council meeting, the speculation arose among market participants, that it will taper it recently reduced asset purchasing program.

What we know for sure is that the growth outlook has improved in recent months for the Eurozone and that the ECB has repeatedly increased its growth forecast for the Eurozone. The positive outlook for the Eurozone has also been confirmed by the World Economic Outlook from the International Monetary Fund that has increased the GDP growth estimate for 2018 and 2019 by 0.3 percent upward to 2.1 and 2.0 percent respectively. Improved growth forecast is a justification for the previous ECB decision to halve its bond-buying program, but contrary to headlines from Bloomberg, I saw no pledge of the ECB revisiting neither timing nor extent of the program anytime soon. For details of my ECB minutes analysis click here.

• My first prediction is that discussion on timing or extent of the asset purchasing will be strongly opposed by ECB President Mario Draghi during the press conference

Instead of speculating about asset purchasing program of forward guidance on asset purchasing, I expect the ECB President Mario Draghi to use his time at the spotlight of world business TV cameras and traders around the world to talk the Euro down. Strong Euro is a detrimental element to ECB’s main inflation target. While the ECB sees better growth prospects, it still sees signs of the inflation very much subdued. And with Euro’s appreciation chances of importing some of that inflation are diminishing. I expected ECB to verbally intervene in my piece back from January 12, for detail click here.

• My second prediction is that Draghi will do whatever is necessary to talk the Euro down during the press conference.

Discomfort with the current strength of Euro has already been indicated by the verbal intervention of the Banque de France Governor Villeroy, who confirmed my prediction of the adverse effect of Euro’s appreciation on import prices.

The FX market has already witnessed the ECB verbal intervention a few months ago. With the ECB threshold of acceptability of EUR/USD exchange rate somewhere at around $1.2000 in September last year, massive talk of Euro’s strength followed at the ECB press conference in September last year and in public speeches of the ECB officials thereafter. Now with the EUR/USD trading at around $1.2200, the real pain threshold might not yet be reached, but it is still high enough to trigger the verbal intervention.

As the talking down might prove little effective with only short-term market impact, there are other policy instruments he has at his disposal to use. Draghi can always want to indicate markets that the recent Euro’s appreciation is belittling inflation to extend that the ECB is pondering of prolonging the reduced asset purchasing. Such muve would have an immediate EUR negative effect even without ECB acting on behalf of the program itself.

• My third prediction is that the ECB may opt to use the conditional guidance indicating that it is tilted to prolonging the asset purchasing in order to influence markets.