Draghi Chooses Stability Over Domestic Agenda

Immediate Reaction:

The euro rallied back towards 1.14 against the dollar today following a relatively uneventful policy announcement and press conference from the ECB. While we expected the former, Mario Draghi has a knack of creating havoc in the markets, something he clearly tried to avoid today with his discrete hints that further rate cuts remain on the table while not giving any indication that this would be the preferred option.

Draghi made it very clear today that all policy tools remain on the table, that rates would remain at or below present levels for an extended time and that experience with negative interest rates have been broadly positive. But in acknowledging this, he gave no clear indication that the next move would be to cut them again if further easing was needed. The small rally in the euro following this – about 50 pips against the dollar following a similar rally prior to the press conference – appeared to reflect traders relief at Draghi’s refusal to revert to old tricks and intentionally talk down the single currency.

This is just the latest example of major central banks appearing to favour market stability over their own domestic agenda, with the Fed having pared back its own tightening plans and the Bank of Japan having so far resisted temptations to weaken the yen at a time when it has appreciated at an alarming rate.

One Hour Later:

The euro has since fallen back below 1.13 to where it traded earlier on in the day, potentially suggesting that following Draghi’s vague comments on possible stimulus measures and lack of insight with regards to timing of their use, traders are no wiser than they were this morning. It should also be noted that this has coincided with broad dollar strength early in the US session which has seen the greenback reverse earlier losses to trade flat on the day.

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