Draghi’s Hope and a Prayer Skins the EUR Bear

Bearish EUR traders are likely feeling deflated after European Central Bank (ECB) President Mario Draghi blew a lot of hot air at his post-ECB meeting press conference earlier today. There was more quantitative easing (QE) speak, but it was not as dovish as expected, resulting in pushing both Bunds and regional yields higher while leaning on EUR short positions. That prompted many traders to take some well-earned profit off the table.

With the ECB failing to provide any new details on its progress to launch a more aggressive stimulus program, Draghi will be hoping that the markets will not turn against the central bank. In effect, the ECB is trying to buy itself more time. However, the bigger question is will the market allow eurozone policymakers the time they need?

If the markets do happen to lose patience, then investors should be expecting a volatile couple of weeks, as investors watch every piece of data coming out of the eurozone for concrete signs of deflation. If this scenario becomes a reality, there will be a mad scramble out of euro equities and into high-quality bonds.

Prior to this morning’s announcement, a percentage of the market remained on tenterhooks, buying into a more aggressive approach by the ECB. Draghi’s November rhetoric indicated that the ECB needed to move to boost inflation “without delay.” This, along with some carefully placed dovish comments had a minority pricing in something to be announced as soon as this week. The majority is still looking to the first quarter of 2015 for action.

Today’s ECB’s Main Talking Points

There was no tweaking of the second TLTRO, or targeted long-term refinancing operation, which will be officially launched next week. ECB staff members did cut the forecast for both growth and inflation, but Draghi acknowledged that these do not incorporate the recent drop in energy prices.

The EUR bear is being pressed into taking profit off the table. The EUR has rallied from its 27-month low outright (€1.2292) print before the rate announcement, to the mid €1.2450’s. During the process, traders have managed to take out a plethora of stop-loss profit orders on the way. The omission of a sovereign bond commitment has been supporting the EUR on dips for the time being.

He offered little doubt that the details of sovereign QE were already being hashed out, with all possible assets but gold and foreign assets under consideration for purchase. It’s not much of a surprise, but he did appear to be frustrated with the lack of structural reforms in the euro area — advocating a greater “sharing of sovereignty,” but this is clearly outside of the ECB’s mandate to bring about.

As well as this year, to +0.5% from +0.6%, which does not seem like too much, although it worth noting that back in March the staff predicted 2014 inflation would be +1.0%! The 2015 inflation prediction has fallen from +1.3% back in March to +0.7% this morning. There was no mention of deflation at this morning’s press conference.

It’s a fact: Germany is opposed to the Securities Market Program, Outright Monetary Transactions, covered bond and any asset-backed securities purchases. Nevertheless, Draghi does regard QE as a success in the U.S. and U.K. Japan is a different story. The island nation’s QE program is a bit more complicated and it’s driven by several other factors.

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