Draghi Pauses

Market Trends - 03/09/2015

Today’s ECB presser disappointment market participants anticipating an expansion of the asset purchase program commenced under the stewardship of ECB President Mario Draghi in response to the deteriorating inflation outlook.  While in fairness there have been benefits to easing the financing conditions across Europe, mainly with respect to better lending conditions for businesses and individuals, the today’s outlook revisions highlight a raft of problems facing policymakers in the monetary bloc.  The ECB governing council affirmed the downside risks to the outlook by downgrading growth and inflation projections for 2016 and 2017.  While 2015 may not be a blockbuster year in terms of growth, the revision lower was much smaller than the years ahead which saw a substantial cut in the prevailing view.  During the question and answer session, Draghi admitted that HICP inflation figures might actually slip into negative territory in coming months as the outlook for crude oil prices remains mired in a bearish bias.  While deflation does not reflect his main concern, Draghi has not been able to meet his Central Banking mandate.

In one positive note for traders looking for expanded easing measures from the ECB, Draghi did highlight the fact that the ECB governing council is willing to be flexible in respect to the program including possible changes to scope of purchases, size, volume, and duration of assets purchased under the program.  In more concerned comments, Draghi remarked that the external situation, namely the pace of weakening in emerging markets, was indeed a development that the ECB was monitoring.  However, the decision felt largely lacking, albeit necessary ahead of the upcoming G20 summit which is likely to cover a wide array of topics including the global economic outlook and rising threat of a protracted currency war.  Draghi is undoubtedly aware of the potential impact on the regional economy from the recent strengthening of the Euro despite his dismissal of exchange-rate targeting by central banks.  At the end of the day, he is finding himself in a situation similar to his emerging market counterparts in which he must keep the Euro competitive to keep the economy afloat.  More easing is inevitable based on this premise alone, meaning further weakness in store for the Euro down the road.


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