Draghi does not announce new measures – EUR/USD screams

The European Central Bank left all interest rates unchanged, as expected after the not too low inflation numbers and now the focus then shifted to ECB president Mario Draghi that faced the press and did not announce new measures, contrary to some expectations for new moves such as discontinuing the sterilization of SMP program, or in layman’s terms: pushing 175 billion euros into circulation. So, EUR/USD screams higher, completing a move of around 100 pips to new 2014 highs.

Live blog of the event.

Highlights

• Real GDP growth forecasts upgraded
• No new measures – EUR/USD rises around 100 pips.
• Subdued price pressure in the medium terms.
• Gap between Germany and stress countries falling.
• Data has been positive.
• Stronger exchange rate worth 0.4% in lower inflation.
• Inflation expectations well anchored – not like Japan
• 2/3 of lower inflation due to lower energy prices.

Live blog

• 13:15 GMT. All times are GMT. Press conference begins at 13:30.
• 13:15 At the same time, the US will release jobless claims and revised non-farm productivity numbers.
• 13:16 You can watch the press conference here.
• 13:15 In reaction to the rate decision, EUR/USD dropped to 1.3725, then jumped to the former double top at 1.3773 before stabilizing at previous levels around 1.3750.
• 13:19 US data has been quite noisy due to bad weather.
• 13:20 The negative interest rate tool is very powerful, and Draghi will probably explain why he kept his powder dry.
• 13:22 Earlier, German factory orders came out better than expected.
• 13:28 Draghi is awaited
• 13:30 USD/JPY reaches new monthly highs in the meantime.
• 13:30 US jobless claims fall nicely to 323K The 4 week average stands at 337K. The previous read was 349K. It is a 26K drop.
• 13:32 Everybody is waiting for Draghi…
• 13:33 Mario Draghi in the house – EUR/USD at 1.3740
• 13:33 Decided to keep rates unchanged. Moderate recovery is proceeding in line with previous assessments. At the same time, forecasts up to end 2016 support earlier expectations of a lower inflation followed by a return to normality.
• 13:34 Economies remain subdued.
• 13:35 Fully confirm our decision to keep current policy. This will assist the recovery. WE fully reiterate forward guidance. Rates to remain at current or lower levels. Subdued lower inflation extended into the medium term.
• 13:36 Ready to take further decisive action if required.
• 13:37 Draghi repeats known rhetoric but doesn’t present new policy. EUR/USD screams above 1.38.
• 13:38 Inflation expectations remain positive. Real GDP growth forecasts have been revised to the upside. Risks remain to the downside.
• 13:39 Inflation for 2016 is expected to stand at 1.6%. 2014 inflation has been revised to the downside.
• 13:40 Subdued underlying growth as expected.
• 13:41 Increase in M3 growth in January compensates for December.
• 13:42 Annual M3 growth due to increased interest of international investors in euro-area assets.
• 13:43 Lagged relationship between money and economy. 0.2% growth in household lows.
• 13:44 Since the summer of 2012, banks are working in a better manner.
• 13:45 Subdued price pressures in the medium term.
• 13:45 EUR/USD pressured higher above 1.38
• 13:46  Debt to GDP ratio expected to peak in 2014 before dropping in 2015
• 13:47 Governments should push debt on a downwards trajectory
• 13:47 Questions begin
• 13:48 Draghi asked about EUR value
• 13:48 Answer: Baseline scenario confirmed. News are on the positive side.
• 13:49 Gap between Germany and stress countries is falling (Italy and Spain). Fall of unemployment, including in Portugal.
• 13:50 Monetary policy stance remains loose, forward guidance confirmed.
• 13:51 Further normalization of conditions.
• 13:51 We decided not to act thanks to better data.
• 13:52 Exchange rate is not a target. Effect of stronger exchange rate on inflation: 0.4%.
• 13:53 Question about SMP and about deflation from a Japanese reporter.
• 13:54 No money market developments that would require the discontinuing of the SMP sterilization. Limited effect in doing that.
• 13:55 On the difference from Japan: inflation expectations de-anchored in Japan.
• 13:56 Next resistance: 1.3832
• 13:57 Low energy prices weigh on inflation.
• 13:58 0.5% contribution from the price of energy.
• 13:59 In early 2012, energy contributed 1% and now =0.3%.
• 14:00 2/3 of lower inflation due to energy.
• 14:01 Question on unanimous vote or not.
• 14:03 Mild convergence between various countries.
• 14:04 Broad discussion on rate cut.
• 14:06 Emerging markets are also responsible for themselves.
• 14:05 Regarding Ukraine, the interconnections are limited. The geo-political risks in the area could become substantial.
• 14:09 Draghi mentions options, and one of them is QE.
• 14:10 EUR/USD now retreating from the highs, to 1.3808.
• 14:12 A question about the exchange rate, following up on Draghi’s earlier comments: EUR/USD rose 9% since the bottom. Each 10% rise pushes inflation 0.4%-0.5% higher.
• 14:13 We now see the exchange rate as a significant factor.
• 14:14 The euro-area is an area of stability, but also needs to be an island of prosperity and job creation.
• 14:15 EUR/USD seems to stabilize at around 1.3810.
• 14:17 Current monetary stance will remain after an improvement is seen in the economy, even as real interest rates go down.
• 14:18 There is a dynamic that is: while inflation is currently low, it is expected to rise back to normal.
• 14:19 Many assumptions become fragile as they are longer.
• 14:20 Monetary policy acts with a lag, asks an FT reporter, which also asks about the politics of the ECB.
• 14:21 Draghi says that credit conditions remain weak, and they indicate future growth. Stabilization of credit growth is seen everywhere.
• 14:22 We see some convergence between stress countries and core countries. We see improvement in the funding side especially in the periphery.
• 14:22 Loose policy finding its way to the economy, finally. It also depends on the transmission mechanisms.
• 14:23 Repair of the bank channel could speed the recovery, as they transmit monetary policy.
• 14:25 Ukrain crisis had an impact on Ukraine, Russia and limited impact on bordering countries. Impact on Russia has been severe.
• 14:26 EUR/USD ticking higher to 1.3820.
• 14:29 Not the time to squander all the human capital made in past consolidation efforts.
• 14:31 EUR/USD breaks resistance and reaches 1.3835. Highest for 2014.
• 14:32 Question if the OMT is on hold
• 14:33 OMT is fully ready for use. IMF is just one of many voices.
• 14:34 We are working on several tracks: AQR, stress tests and SSM.
• 14:35 Will the SSM and SRM begin together? Draghi moves to non-monetary policy topics and EUR/USD remains high. 1.3842 was the high so far.
• 14:36  ECB view is that the mutualization process should be sped up
• 14:37 Resolving a bank is often a matter of hours.
• 14:38 Press conference over. Next big event: Non-Farm Payrolls. See how to trade the Non-Farm Payrolls with EUR/USD.
• EUR/USD ends the presser nearly 100 pips higher.

Background

Price growth is weak in the euro-zone, with only 0.8% in headline CPI and 1% in core CPI according to initial data for February. The high value of the euro depresses exports and makes imports cheaper. Setting a negative deposit rate could have sent more money to the economy and lowered the value of the currency. However, the ECB does not see a danger of deflation, according to recent statements. The single mandate of the central bank is price stability.

In the preview, we noted the lower chances of setting a negative deposit rate but there are good chances of pouring money via the end of SMP sterilization.

After the press conference, join a webinar: run down of the ECB and run up to the NFP.