Draghi’s Rhetoric to Show ECB Near Limit

The ECB Will Try To Regain The Trust of the Market

The European Central Bank (ECB) will announce its minimum bid rate on Thursday, April 21 at 7:45 am EDT. There is no change expected as the central bank has pushed into negative rates and signalled they won’t go further. ECB President Mario Draghi’s press conference at 8:30 am EDT will be the highlight of the session as the market is uncertain how the central banker will try to communicate with investors.

The EUR/USD has been trading in a 1.1280 and 1.1380 this week. The market has been focused on Mario Draghi’s words more than the actions of the ECB. It remains to be seen if the policy maker has learnt from his past experiences and will match his rhetoric to the actions he can convince the rest of the council to follow. Germany in particular has been critical of the amount of stimulus and will be more forceful to block further monetary policy easing.

Mr. Draghi is expected to be more careful about his choice of words seeking to reassure investors that the ECB can still impact economic growth in the Eurozone and fight off the threat of deflation. European banks will be worried at mentions of further negative rates although Draghi’s comments from March should still stand on that topic.



The EUR/USD has fallen 0.562 in the last 24 hours ahead of the ECB’s rate announcement and President Draghi’s comments. The pair is once again headed under the 1.13 price level as dovish rhetoric from Mr. Draghi is expected given how resilient the EUR has been to actions and words from the central bank. The safe haven flows in the last week started to fade as risker assets were preferred and could combine with pessimistic comments from Draghi to depreciate the EUR and give a boost to European exporters.

The ECB has had a difficult time communicating with the market in the last five months. The U.S. Federal Reserve meeting in December was on track to make history as the U.S. central bank eventually raised its benchmark rate after a long time coming. The ECB had piled its rhetoric high and convinced the market that they would also make a major announcement only to come short of expectations and drove the EUR even higher despite a higher American interest rate.

ECB Chief Mario Draghi had increased the easing rhetoric last year and was shocked when what he delivered in December 3, 2015 triggered a EUR appreciation. The ECB lowered the rate deeper into negative territory to – 0.3 percent, extended the quantitative easing program by six months (up to March 2017), announced a reinvestment of maturing bonds into new debt and added new assets that could be part of the program. Missing from the monetary policy announcement was an increase to the asset purchase program amount. The QE program is a 60 billion euro a month, and even back in December there was an expectation of a 10 to 20 billion upgrade.

The meeting minutes from the December meeting highlight the divisions that exist within the ECB as not all members favour more QE and will not vote for it regardless of what Mr. Draghi has told the market. Further complicating things for the ECB a larger amount of QE would present a logistical problem as there are not enough bonds to purchase as early as November of this year if there is an expansion given the restrictions of the program. Anxiety has risen ahead of the ECB monetary policy decision as the benefits from negative rates are not obvious and there are plenty of obstacles for a QE expansion.

The European Central Bank (ECB) learnt a lesson from the December meeting communication failure and over delivered on market expectations in March. The central bank cut several rates with the deposit rate now at –0.4 percent, a 20 billion euros expansion to its quantitative easing (QE) program that is now 80 billion euros a month, the inclusion of non-bank corporate bonds as assets available for purchase and a Targeted Longer-Term Refinancing Operations TLTRO II. The statement made waves across the forex market depreciating the EUR. In a sharp twist as soon as ECB President Mario Draghi started giving his press conference to give further details on the bazooka he just blasted it all went topsy turvy as the single currency started to appreciate.

After delivering a kitchen sink approach Mr. Draghi felt confident to mention that negative rates had an inevitable floor and dismissed the two tiered deposit rate system. Taken out of context the comments are fair and have sound logic given Mr. Draghi’s bazooka was still warm, so he felt no need to fire again so soon. The December communication failure was the result of the ECB under delivering after over promising and now in March the central bank found itself over delivering and under promising with a somewhat similar outcome.

Forex market events to watch this week:

Thursday, April 21
4:30am GBP Retail Sales m/m
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, April 22
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza