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A Less Upbeat Draghi Sends the Euro Lower

Gregory Marks

Key Draghi Comments:

-Euro Area inflation risks ‘broadly balanced’

-Euro Area may face a prolonged period of low inflation levels

-ECB expects that rates will remain low for an extended period

-ECB ready to consider all instruments available

-ECB does not see deflation

-ECB discussed deposit facility rate

-ECB effectively ready to move the deposit rate

-weaker growth remains a downside risk to inflation

-it is essential to strengthen the resilience of banks

-higher commodity prices would weigh on inflation

-ECB sees protracted, broad-based period of lower inflation levels

-unemployment appears to be stabilizing

Mr. Draghi’s press conference following the ECB rate cut 45 minutes prior spurred continued Euro weakness as the central bank president’s comments focused mostly on inflation expectations and ECB policy moving forward. As for future policy out of the ECB, Mr. Draghi stated that the central bank is prepared to use all available instruments and expects rates to remain low for an extended period of time.

The most surprising comments from Mr. Draghi came in regards to the deposit facility rate- currently at 0.00%. This is essentially the rate that banks are paid to park their surplus cash at the ECB. If the ECB is inferring they may actually cut the deposit facility rate into negative territory, which has been hinted at before, essentially banks would have to pay the ECB in order to leave funds with them. Theoretically, this would put pressure on banks to remove tens of billions of Euros from the ECB and lend them out. In actuality, this may contribute to capital outflows and higher bond yields as fears rise again among investors about the prospects of the Eurozone in the medium-long term.

EUR/USD (30-Minute Chart)

A_Less_Upbeat_Draghi_Send_the_Euro_Lower_body_Picture_1.png, A Less Upbeat Draghi Sends the Euro Lower

Source: FXCM Marketscope

As Mr. Draghi’s speech comes to an end, the EUR/USD pair is down almost 180 pips from just before the rate cut announcement. With the benchmark interest rate cut and inflation worries abound, Mr. Draghi and his fellow ECB officials will certainly be more wary of talking up higher confidence index prints in the future.

Gregory Marks, DailyFX Research Team

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