Judging by the euro’s broad rally yesterday, it looks like market players approved of what Draghi had to say! Here are 4 key takeaways from his speech.
1. The euro is a strong currency.
ECB President Mario Draghi wasted no time in talking up the euro. In his speech, he slammed its critics, saying that they underestimated the euro zone leaders’ commitment to a single currency. Haters gon’ hate!
Draghi even went on to say that the problem is that they see the euro as a fixed exchange-rate regime. He said they were wrong about this point because the euro is an irreversible currency, as it is born out of the European nations’ commitment to closer integration.
2. European banking union in the works.
The ECB head honcho also hinted at progress in the banking union issue. He stressed the importance of having a unified bank sector to match the unity of the single currency. He and other EZ leaders plan to do this by removing the differences in the way banks are supervised and even using national authorities to resolve conflicts.
The ECB is due to supervise the major banks in Q4 2014 and Draghi now expects to see a single resolution mechanism by early 2015.
3. LTRO vs. rate cut
When it comes to further easing moves, Draghi seems to be leaning towards implementing more long-term refinancing operations (LTRO) rather than slashing interest rates. After all, he did say that the central bank was “ready to act if needed” but that their priority was to keep a lid on money market rates.
Word through the forex grapevine is that Draghi has already asked a technical committee to conduct a study on alternative bank funding measures and other unconventional financial instruments. Ooh, the plot thickens!
4. Further easing isn’t an urgent matter.
Although Draghi is keeping the door open for more stimulus, it seems that additional easing won’t take place any time soon. Remember that Draghi has been giddy about the recent developments in the euro zone, as he also said that he’s seeing a “gradual improvement from low levels” of economic performance.
Another ECB official also mentioned that the central bank is determined to stay consistent with its forward guidance in order to prevent money market rates from going haywire. Sudden changes in monetary policy bias could cause quite a ruckus after all!
By the looks of it, it appears that the ECB isn’t likely to make any actual easing moves in the near future. The central bank is intent on reestablishing the strength of the euro as a shared currency, and they plan to achieve this by stabilizing the economy and the banking sector.
Does this mean we’ll see a steady recovery for the euro until the end of the year? Let us know what you think by voting through the poll below!