ETF Securities Research Blog

ECB communication – a masterclass in subtle communication

Today’s European Central Bank (ECB) press conference was an exercise in subterfuge: a subtle communication of tapering without actually discussing the concept. Draghi is trying to throw the market off the ‘scent’ by noting “there were 2 observations on policy normalisation (aka tapering) but no discussions on it”. As a result, we expect the Euro to move lower in the near-term until the need for tighter monetary policy for the Eurozone becomes a more strongly voiced position.

Although the ECB removed the commitment to lower rates, and felt that the tail risks for deflation weren’t present anymore, the CPI outlook was downgraded for 2018 and 2019. Inflation expectations have the potential to become ‘unanchored’ over the ECB’s forecast horizon. Indeed, delivered CPI is more often than not coming in above expectations. At the same time, PMIs continue to rise, now at 57 vs 55 for US and close to the highest in the world. So although Draghi noted the decline being a result of declining oil prices, this seems unusually low given recent economic strength and the potential for trend of inflation to consistently beat expectations. We expected the ECB would be becoming more hawkish and at least give the ECB’s Governing Council discussions the weight they deserve.

Nonetheless, we are not surprised by EUR weakness, with markets expecting more hawkish rhetoric.  A further unwind remains a risk as CFTC positioning data shows extremely bullish sentiment. We expect EUR weakness is unlikely to persist in the medium term as Draghi’s comments lay the groundwork for future tapering communication – this question is likely to come up repeatedly in upcoming meetings.

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