Ha! Told y’all the ECB was bound to sound downbeat! Here’s a quick rundown of what happened during the ECB statement and why the euro got beaten up by its forex rivals when Dovish Draghi grabbed the mic.
1. More stimulus in December?
Even though ECB policymakers agreed to sit on their hands and keep monetary policy unchanged for the time being, Governor Mario Draghi confirmed during the press conference that they’re very much prepared to increase stimulus soon. In particular, he shared that the committee will re-examine the degree of monetary policy accommodation in their December meeting.
By then, ECB officials and forex market watchers will have a fresh batch of data to pore over, including revised quarterly growth and inflation forecast from the central bank’s economic staff. Better pay close attention to the CPI estimates, as another negative headline reading could seal the deal for more QE.
2. Another rate cut possible
Increased bond purchases ain’t the only tool in the ECB’s shed, as Draghi hinted that deposit rates could be dragged much lower. Recall that the ECB already implemented negative deposit rates in June last year, which meant that banks actually had to pay in order to park cash in the central bank’s vault, in order to stimulate lending activity.
This was followed by another rate cut in September 2014 to -0.20%, which Draghi said was already the lower bound. Back then, the ECB head honcho assured that deposit rates couldn’t possibly fall any further… but now he’s saying that circumstances have changed.
3. Euro needs to weaken
As though strong hints about further QE and deposit rate cuts weren’t bad enough for the euro, Draghi also pointed out that he’d like to see a much weaker currency. In fact, he said that the euro’s recent gains posed downside risks to growth and inflation. After all, a strong local currency makes exports more expensive and imports cheaper, weighing on trade activity and domestic price levels.
4. Blames slowdown in emerging markets
Perhaps the biggest factor that convinced ECB policymakers to don their dovish feathers was the downturn in China and the emerging markets. Heck, almost every economy has been complaining about this one for the past few months!
Keep in mind that the euro zone is one of the weakest in the bunch when it comes to fundamentals, as the region has struggled to get back on its feet earlier this year. With that, its economic footing hasn’t been very stable yet, which means that it’s still vulnerable to external risks.
“While euro area domestic demand remains resilient, concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation,” Draghi said in his opening statement.
5. Not wait-and-see, but work-and-assess
Staying in a wait-and-see mode seems to have gotten too mainstream for central bank officials these days so Governor Draghi decided to blaze a new trail by saying that the ECB is in a work-and-assess mode. “We are ready to act if needed, we are open to a whole menu of monetary policy instruments,” he explained.
As part of his forward guidance, Draghi said that the relevant committees are already in the process of examining the ECB’s options for policy easing. He even shared that a few governing council members have expressed their preference for additional stimulus this week, hinting that most ECB policymakers are in agreement that the region could use more help.
In a nutshell, the ECB monetary policy statement was a decidedly dovish one, even more so compared to their earlier rate decision. As Big Pippin shared, Draghi’s remarks were enough to spur long-term triangle breakouts among euro forex pairs, suggesting that a strong downtrend is in the cards. Of course this could still depend on how the upcoming economic data turns out so stay on the lookout for potential trend continuation or reversal signals from those!