Wondering why EUR/USD dropped like a rock even when Draghi didn’t announce anything new during the ECB rate statement? These three takeaways might shed more light on the euro’s forex reaction.
1. Draghi confirmed ECB solidarity
So much for those rumors claiming that the ECB is falling apart when it comes to making policy decisions! While Draghi was recently accused of being “secretive” and for over-stepping his authority in announcing the recent ECB easing moves, the central bank head set the record straight in saying that ECB officials are committed and unanimous in implementing additional stimulus.
Apart from restoring credibility in the ECB, Draghi’s comments on central bank solidarity were enough to convince most forex traders that there won’t be much opposition in making further policy adjustments later on. Draghi also threw cold water on speculations that there was a growing North-South divide among euro zone nations and reassured that the region would keep a united front.
2. ECB still open for more stimulus if needed
The ECB‘s openness to additional stimulus is no longer a surprise, but the fact that Draghi highlighted the region’s weak inflation readings signals that more dovish moves are very likely to happen sooner or later. After all, inflation stood at 0.4% in October, miles below the ECB’s 2% target. With that, Draghi mentioned that the ECB staff and relevant Eurosystem committees are already preparing the groundwork for potential QE.
3. ECB talks balance sheets!
What gave the ECB’s easing bias more weight was Draghi’s mention of balance sheet targets in their latest statement. Previous ones simply included vague clues on the size and scope of their potential easing, but Draghi’s recent remarks contained a clear and concrete goal of bringing the balance sheet back to its 2012 levels. This means that the central bank might pump as much as 1 trillion EUR in the system by printing more money or more debt purchases.
For now, Draghi still stopped short of specifying what kind of measures they will be taking in order to shore up the ECB balance sheet, but forex market participants are already buzzing about purchases of EFSF or ESM bonds and covered bank bonds. Regardless of which options the ECB chooses, Draghi has pretty much sealed the deal that more easing will take place.