FYI | Mar 07 2014
By Kathleen Brooks, Research Director UK EMEA, FOREX.com
The ECB kept policy unchanged at this month’s meeting defying calls from the IMF to cut rates and start its own QE programme. This month also included the latest staff economic forecasts for growth and inflation, and both painted a fairly upbeat picture, which justifies the ECB remaining on hold for now.
The major highlights from Draghi’s press conference include:
• ECB growth forecasts were revised up to 1.2% for 2014, 1.5% for 2015 and 1.8% for 2016.
• Inflation forecasts revised down a touch: 1% for 2014, 1.3% in 2015 and 1.5% for 2016.
• Inflation for Q4 2016 is expected to be 1.7%, which appears to be acceptable to the ECB.
• The ECB reiterated how it expects a long period of low inflation, although it still believes that medium-term inflation expectations are well anchored.
• The ECB reiterated its forward guidance to maintain an “accommodative monetary policy stance for as long as necessary.”
• Mario Draghi mentioned weak loan dynamics in the currency bloc, although the statement said that this could reflect the lagged relationship with the business cycle.
The market impact:
Ahead of the meeting, there was some expectation for potential policy tweaks at this month’s meeting, for example ending sterilisation of peripheral bond purchases (part of the SMP programme). There was also a risk that Draghi could talk down the EUR; however the ECB refrained from doing either.
From a market perspective, the bigger risk would have been if Draghi had attempted to talk down the EUR. He has used his monthly press conference to weaken the EUR in the past, for example in February 2013 when he triggered an 800 pip sell off in EURUSD over the following 6 weeks.
However, at this meeting Draghi sounded far less concerned with EUR strength, saying that the currency is not a policy tool. He also added that the improvement in the recent PMI surveys has been encouraging, suggesting that the ECB is happy with the growth outlook even with the EUR close to 2011 highs.
Instead the upward revision to the growth and Q4 2016 inflation outlooks has triggered a rally in the EUR, which is now at its highest level of 2014 so far. A weekly close above 1.3830 – a critical area of resistance, a trend line dating back to 2008 and 61.8% Fib retracement of the May 2011 to July 2012 sell off, would be an extremely bullish development that could trigger another leg higher for this pair.
So far the high of the day has been 1.3854, if we can stay above 1.3830 then the next key resistance levels include:
• 1.3893 – Dec 27th high
• 1.3958 – the top of the monthly Ichimoku cloud.
• 1.40 – key psychological level.
There is still another obstacle for the single currency – tomorrow’s payrolls report from the US. Weak productivity and factory orders have weighed on the USD, but the longer-term direction for the buck will be dependent on the NFP report released on Friday. The market is looking for another weak reading, however, if we get a number that is stronger than expected then we could see a reversal in the dollar, which could weigh on EURUSD.
Takeaway:
Overall, the ECB meeting was more upbeat than some had expected, which triggered a rally in the EUR. The ECB seems happy to leave policy unchanged and they don’t seem particularly concerned with the strength of the single currency, which has been used as a green light by the bulls on Thursday. However, US Non-Farm Payrolls released on Friday is a key risk event for this pair, since a positive surprise could trigger a reversal in the dollar, and weakness in EURUSD.
Figure 1:
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