Draghi Promises Gifts But Turns Up Bearing Coal

Mario Draghi and the European Central Bank have spent the weeks leading up to today’s meeting building up easing expectations only to under-deliver on an enormous scale. The market was led to believe it was getting a fantastic holiday treat and ended up with an exquisitely wrapped lump of coal.

After cutting the deposit rate by a measly 10 basis points, the lower end of what the market was expecting, the ECB opted to leave the size of its asset purchases unchanged and extend it to only March 2017, only six months beyond when it had previously committed itself to. It was believed that the ECB would plan an assault on low inflation on three fronts, the deposit rate, size of purchases and duration and the central bank barely attacked on two of these.

Either Draghi does not have the influence within the ECB that he thought, or he has totally misled the markets in recent weeks. Whichever it is, it is a little concerning and suggests the central bank is limited on what it is willing to do to tackle the inflation issue.

The markets were extremely disappointed with the outcome from the ECB, with the euro rallying strongly to trade at 1.09, up from 1.05 earlier in the day. The poor performance from the ECB has put an end to the EURUSD parity question this year, with even bold action from the Fed in a couple of weeks very unlikely to achieve this, to the delight I’m sure of Chair Janet Yellen.

I was surprised that the ECB continued to talk up easing after the Federal Reserve signalled in October that it plans to hike interest rates and now I wonder whether this influenced its decision to significantly under-deliver. The euro has weakened dramatically already against the dollar due to the intentions of the Fed which has effectively given the ECB a free pass. With that in mind, I can’t help but think the ECB has bottled it today and will be forced to do more next year as inflation continues to fall well short of target.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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