Even though the European Central bank (ECB) lowered their 2017 and 2018 growth and inflation forecasts, and acknowledged that the risks to these forecasts are skewed to the downside, Mr Draghi and the other ECB governors made no adjustments to European monetary policy at yesterday’s meeting in Frankfurt.
The overnight deposit rate of -.40% was left unchanged, as expected. However, the ECB also refrained from extending the timeframe of QE from the current date of March of 2017; which was disappointing since it was the only policy action that market commentators were discussing as a highly likely possibility. Bond yields across G-7 treasury markets traded higher, ( Euro zone stocks lower) in response as further stimulus, against a weaker economic outlook, appears be delayed.
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Only in the eyes of the ECB can a slower pace of economic and inflationary deterioration be considered an improvement in overall conditions. During his press conference, Mr Draghi pointed out several times their stimulus options are not exhausted and that the ECB has the will, capacity and ability to do more within their mandate. This includes extending the QE timeframe beyond March of 2017, when needed.
After all was said and done, a lot was said and nothing was done. There was no date provided for the new staff forecasts which sets up a “FED” style data dependency for Euro traders until the next key meeting in December.
After trading in a narrow 30 point range around the 1.1250 level prior to the ECB meeting, the EUR/USD climbed up to the 1.1320 level just after the announcement. However, as the NY session progressed the pair reversed lower on the eventual divergence between US rates moving higher and EU rates drifting lower.
