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ECB’s Draghi Squashes the EUR

By:
Barry Norman
Updated: Aug 21, 2015, 00:00 UTC

Markets and traders had already forecast that the ECB would hold rates and policy at yesterday's policy meeting. So, there was no surprise when the

ECB’s Draghi Squashes the EUR

ECB's Draghi Squashes the EUR
ECB's Draghi Squashes the EUR
Markets and traders had already forecast that the ECB would hold rates and policy at yesterday’s policy meeting. So, there was no surprise when the announcement came that they were left unchanged. However, this decision may have been a little bit closer than generally thought. The EUR/USD showed very little reaction. Markets were also expecting a downward revision of growth for the eurozone. But this would not be released until Mr. Draghi’s presentation later in the evening. The euro remained in a tight range keeping a positive sentiment.

Mr. Draghi acknowledged that a rate cut had been discussed as had the more contentious issue of a negative deposit rate. The general tone of Mr. Draghi’s comments yesterday suggest the ECB is more open to the possibility of a further cut in its key policy rates than many in the market had anticipated.

However, as we noted in previous assessments, clearer signs of a further weakening in eurozone conditions, entailing a softer trajectory for ‘core’ economies, may be needed to forge a consensus for a further easing.

What shook the markets were the ECB staff projections that showed a larger than expected reduction in the outlook for growth through 2013. The midpoint of the staff projection envisages a fall in GDP of 0.3% next year, a significantly weaker outcome than +0.5% increase in GDP seen in the ECB’s September projection. This represents a relatively large amendment to what was already expected to be as a sluggish Eurozone economy in the year ahead. Arguably of greater significance, the ECB’s new forecast is notably lower than recent forecasts by the EU Commission (+0.1%) or OECD (-0.1%).

Along with the downward revision for the balance of 2012 and 2013 was the first peak at expectations for 2014 growth.  This offered some recovery in GDP growth. However, the details of Thursday’s projections suggest an extended period of subpar economic activity and the ECB statement also acknowledged that risks to the outlook remain to the downside. Consumer spending is now expected to decline by 0.6% in 2013 and is only seen recovering by 0.5% in 2014. So, consumer spending across the Eurozone will remain fairly depressed for the next couple of years.

To spell it out in simple terms, the ECB is not seeing a recovery until sometime in 2014, which means the EU problems, will continue to weight on global economies. The EUR/USD turned negative and plummeted over 100pips at one point and is trading at 1.2969 flat this morning. The GBP/USD fell in sympathy to trade at 1.6053; UK growth was revised downward the prior day after the Chancellors Autumn statement. The BoE held rates and policy on Thursday, with no statement.

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