During this week’s ECB monetary policy statement, Mario Draghi and his men decided to keep interest rates on hold at 0.75%. Even though this was widely expected, the euro zoomed up right after the announcement, as EUR/USD broke above the 1.3200 handle and EUR/JPY surged past the 117.00 mark.
As it turns out, it was Draghi‘s surprisingly hawkish speech that lifted the euro’s spirits and boosted overall risk appetite yesterday. Equities and higher-yielding currencies reacted positively to Draghi’s remarks, which painted a rosier landscape for the euro zone this year.
Not a lot of market watchers were expecting the central bank head to give an upbeat statement since he just discussed the possibility of reducing rates last month. After all, the euro zone is back in recession while the region’s annual inflation rate remains above target, supporting the case for a rate cut.
Why the heck did Draghi change his mind? Was it his New Year’s resolution to stop being such a buzz kill?
Perhaps one of the main reasons that led Draghi to shed his dovish feathers is the considerable improvement in the region’s financial standing. He noted that bond yields are much lower and that European markets have started to stabilize after more than three years of chaos.
As always, the possibility of contagion was still discussed but Draghi talked about positive contagion this time around. “We spoke a lot about contagion when things go poorly, but I believe there is positive contagion when things go well,” he said. According to him, the improvements in the region’s financial markets will restore confidence and economic growth later on.
As for inflation, Draghi assured that risks to price stability remain balanced and that the euro zone’s annual CPI will eventually drop below the central bank’s 2% target this 2013.
Before the markets could get carried away with all the euro-phoria, Draghi also warned that some downside risks are still present. One of these is the rising level of unemployment in several euro zone nations, particularly in Spain where youth unemployment is at an all-time high.
While Draghi admitted that it was too early to claim that the worst is over for the euro zone, he did point out that the situation was starting to appear a bit more normal lately. As evident in the ECB statement, policymakers are shifting their focus from a fiscal crisis to an economy recovery, just like everyone else. Now that’s excellent progress in my book!
Do you think that the improvements in the euro zone will last? Will 2013 be a better year for the euro? Let us know by voting through the poll below!