The ECB has finally grabbed the markets attention. Draghi’s words this week have certainly hooked investor’s interest for next month’s meeting. Asset class should be expecting greater volatility right up to the next rate announcement and press conference.
Are investors being led down a similar path they took in March when Draghi vocally tried to undermine the EUR’s strength? This time seems different as Draghi dropped very strong hints at possible policy action in June.
Focusing on three sets of possibilities while expressing the Bank’s serious “concerns about the strength of the currency” has the market anticipating a refi rate cut at that meeting. It’s clear that Draghi has abandoned previous ECB president’s belief that the ECB never “pre-commits” – he noted if needed, that the committee had laid the foundation for action in June.
His fighting words have created a unique problem for Euro policy makers – Draghi has made it hard for the ECB not to come up monetary action on June 5th. A large percentage of the market has interpreted his comments this week as a sign for action. It’s a reasonable assumption, but by no means a given. The question remains, what exactly will the ECB do?
There were no surprises from the Bank Of England. It left main interest rates (+0.5%) and the total size of its bond buying unchanged (£375m) at their first meeting since unemployment tumbled past a benchmark (+6.9% vs. +7%) that Carney and company had set out nine-months ago.
Attention now turns to the Inflation Report (May 14th) and the minutes of last weeks meeting (May 21st). Both should provide greater insight into UK’s rate outlook. The market will also get a better insight to the dove/hawk scale.
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