The ECB is Clearly NOT Hawkish

ECB, Clearly, not, Hawkish, Monetary Policies, European Central Bank, Draghi, fx trader, forex

The European Central Bank is certainly very happy to see the downward pressures on the single currency which now makes it possible to expect an inflationary surge in the euro area. It’s been a while since the euro has not been so weak against the US dollar which continues to appreciate in view of a very likely Fed rate hike.

For several months now, meetings of the ECB have followed and resembled each other. The wait-and-see attitude was predominant and the outlook for inflation has been often revised downwards. Avoiding going into a Japanese-style monetary policy was necessary and justified the mutism. Finally, Mario Draghi has announced that the quantitative easing program will continue beyond March until December 2017 adding more that €540 of stimulus for the Eurozone. Not very hawkish.

It was clear that the European Monetary Policy Committee was awaiting confirmation from markets of the rise in US rates, repeatedly postponed.  When markets priced in a 100% likelihood of a Fed action, it was the time for the ECB to act as dollar demand should continue to rise. The success of a monetary policy depends greatly on the global environment and international competitiveness is paramount. Being able to import inflation is necessary, and this seems definitely possible.

Now remains a problem inherent in any accommodative monetary policy for Mario Draghi. Financial markets questioned the bonds scarcity issue which the ECB addressed by lowering the pace of the asset purchase program to €60 billion a month. It is worth saying that it is not in any way a tapering strategy. I consider that Draghi knows the volume of bonds that may be purchased is limited so this move was necessary to give to the ECB the opportunity to expand its QE after 2017.

In addition, the Central Bank lifted one major structural constraint to its program which confirms the dovish tone of the ECB. Indeed, the institution can now buy bonds with a lower rate than the deposit rates, currently at -0.4% with a maturity of one year. However, it is still not possible for the ECB to own more than 33% of a country's debt.

Clearly, given the current state of the European economy, i.e. modest growth of around 2% and virtually zero inflation, markets expected these constraints to be lifted and this is why the bond market, especially low maturities bonds, tended to increase prior the meeting.

There are, however, some elements on the market that suggest that an inflection point has certainly been reached. A strong dollar will allow the euro area to continue importing inflation. China is also becoming an exporter of inflation in light of the latest figures and this is going to help the ECB.