Draghi ups the rhetoric ante, mentions FX risk – EUR/USD

There was less certainty this time, but the ECB eventually left interest rates unchanged again, despite falling inflation. Mario Draghi faced the press and came up with more explicit language. He has certainly become tougher in his language: unconventional measures are on the table, including a discussion of QE and a negative deposit rate. After a struggle, EUR/USD eventually retreats.

Here is the live blog of the presser as it happened wrapped with the highlights and the background.

Highlights

• Recovery continuing as expected
• Unanimous commitment to using unconventional instruments within its mandate, if inflation is low for too long.
• Exchange rate is risk
• EUR/USD rallies to 1.38 but returns to range.
• Deflation risks have not increased.
• Negative rate received good deal of attention

Live Blog

• 12:15 GMT. Press conference begins at 12:30. All times are GMT.
• 12:15 You can watch the presser live here.
• 12:15 EUR/USD erased the pre-announcement drops and returned to the top of the very narrow 1.3750 – 1.3773 range.
• 12:16  If Draghi only says “we are ready to act”, it’s not news. But if he adds something like “in the coming months”, we could see fireworks.
• 12:17 At the same time, 12:30 GMT, the US releases trade balance and jobless claims. Both have been improving lately.
• 12:18 EUR/USD is still in the “calm before the storm” mode.
• 12:19 Draghi will be asked about inflation, if there was a unanimous vote, QE, the exchange rate and probably questions related to the AQR.
• 12:20 It’s important to remember that the German Bundesbank has a strong say in the ECB decisions, and keeping inflation low is extremely important to them.
• 12:22 After the presser ends, we have another important US release: ISM Non-Manufacturing PMI – a good hint for tomorrow’s NFP.
• 12:23 Draghi will hopefully rock the euro in one direction or the other. The pair has been suffering from low volatility.
• 12:24 Here is the coverage of the previous press conference:  Draghi does not announce new measures – EUR/USD screams higher
• 12:25 During 2013, Draghi zigzagged between pessimism and optimism. So, will he be pessimistic day? Nothing is certain…
• 12:26 Mario Draghi leads the ECB since November 2011. He cut interest rates 4 times since then.
• 12:27 EUR/USD sliding back down to 1.3755 minutes before Draghi begins. It is certainly range bound.
• 12:28 The event is about to begin. A live feed is shown from the press room.
• 12:29 There are 18 countries in the euro-area.
• 12:30 US data: jobless claims rise back to 326K and the trade deficit rises to 42.3 billion – both are disappointing figures.
• 12:31 Press conference begins
• 12:32 EUR/USD at 1.3763 as Draghi commences.
• 12:33 Rehn also attended.
• 12:33 Moderate recovery is proceeding in line with assessments. Recent information shows prolonged period of low inflation followed by a gradual rise. – no news – EUR/USD rises.
• 12:34 “very closely monitoring” – EUR/USD halts rise.
• 12:35 Fragile recovery, subdued money creation. Unanimous commitment to using unconventional instruments within its mandate, if inflation is low for too long.
• 12:36 The language is tougher than previously heard – EUR/USD unable to sustain gains.
• 12:36 Unemployment and unuitlized capacity remain high.
• 12:37 Geo political uncertainty remains one of the risks for growth. Risks are on the downside.
• 12:38 HICP 0.5% in March. The decrease reflects falls in food, goods and services, partly offset by energy prices. On the basis of current exchange rates, annual HICP is expected to pick up in April, due to Easter.
• 12:39 Risks to inflation are to both directions and are limited. It should return towards normal in 2015 and to normal in 2016.
• 12:40 Risks come from exchange rate and geo-politics. Another mention of the exchange rate.
• 12:41 EUR/USD at 1.3777.
• 12:42 Growth friendly composition needed while minimizing tax distortion.
• 12:43 Making euro-area more flexible
• 12:44 Questions begin
• 12:45 Begin with a unanimous decision and unconventional instruments. QE is included.
• 12:46 There was a discussion about QE and exchange rate intentionally included.
• 12:46 EUR/USD falls below 1.3750.
• 12:47 Well, EUR/USD is not going too low. Volatility is quite low.
• 12:48 Producer prices have shown even weaker dynamics.
• 12:49 Debate was if medium term inflation outlook has changed.
• 12:50 More information is needed.
• 12:50 The final consensus is what was decided upon…
• 12:51 QE, cutting rates and other measures were discussed.
• 12:51 EUR/USD stable at 1.3757.
• 12:51 Asked about details about medium term inflation outlook.
• 12:52 It was harder to assess inflation due to the change in the date of Easter due to travels. We need more data.
• 12:53 Forward guidance is successful. Inflation expectations are anchored. So is EUR/USD which is not enjoying volatility.
• 12:54 Q: Was there a change in support for QE? (from a German reporter)
• 12:55 Last time we didn’t discuss it, and this time we did.
• 12:56 70% of the drop in inflation is due to lower energy and food prices.
• 12:56 Low inflation has some drawbacks.
• 12:57 Low inflation has high percentage of global factors.
• 12:57 Q: How would QE work? We will be reflecting hard on that. Our setup is considerably different than the US.
• 12:58 EZ is based on the bank lending channel. This complicates the situation.
• 13:00 Draghi mentions Japan in regards to deflation. However, we don’t see these risks.
• 13:01 Governing council should not be unconcerned. That’s why we had a wide and rich discussion.
• 13:02 Tough question about a negative deposit rate and exchange rate.
• 13:02 Biggest fear is a worse stagnation, and it is already severe.
• 13:03 Unemployment is very high, and the longer they persist, they become more structural.
• 13:03 Many of the problems of the euro-area are structural.
• 13:04 Negative deposit rate: it was discussed. We don’t target the exchange rate.
• 13:05 Negative rate received good deal of attention.
• 13:06 Question about why the headline inflation is the reason – they didn’t want to exclude inflation.
• 13:07 But… core inflation decline less than headline inflation.
• 13:08 EUR/USD slides below 1.3740. Is the market beginning to asses a move is coming in May or June?
• 13:08 The more outside factors change the headline inflation, the more we use both concepts in our assessment.
• 13:09 Draghi talks about fiscal consolidation and the EUR/USD finally gets out of consolidation, EUR/USD under 1.3730.
• 13:10 Without rules, trust is undermined.
• 13:11 Question about a downwards surprise regarding inflation + question about QE.
• 13:12 ECB projections have been underestimating inflation for a long time. This is due to energy prices. There is no doubt that some profound changes in energy markets are taking place.
• 13:13 EUR/USD is already under 1.3720. We have over 40 pips of net change…
• 13:14 Question about IMF advice to ease even more.
• 13:15 Euro-area can’t go to real growth if the banking system is impaired. In the euro-zone, banks are more important than in other places.
• 13:16 The actual fact of the AQR has provoked actions to strengthen the banking system.
• 13:16 Thank you IMF, but we beg to differ. Calls IMF to give advice also to the FOMC…
• 13:17 EUR/USD is already at 1.3715.
• 13:18 Statement now is more explicit. Even though we are witnessing real improvements in the economy, we have evidence that there is plenty of slack.
• 13:19 Output gap is pretty wide and closes only towards the end of our medium term horizon. That’s why we need stronger growth to close the output gap.
• 13:20 Weakness depends on outside factors but also on internal demand.
• 13:21 EUR/USD at 1.3712.
• 13:22 New credit is actually expanding at relatively decent rates.
• 13:24 Short term expectations are sliding, medium term expectations remain well anchored.
• 13:25 Question about non-standard measures. Answer: we have discussed mostly SMP sterilization, and briefly an LTRO.
• 13:26 Untargeted LTRO will address liquidity. Targeted LTRO will address the economy. The ECB has reacted via a variety of measures.
• 13:27 Squeeze of LTRO without change in rates shows success of forward guidance.
• 13:28 Governing council is unanimous in commitment to using unconventional measures as well.
• 13:29 There are preferences to which QE would be preferred.
• 13:30 Hard to develop QE that would not distort financial stability.
• 13:30 WE are a bank based economy.
• 13:31 ABS is the preferred measure. Then we would have our preferred QE.
• 13:32 Press conference ends.

Background

Headline inflation fell to 0.5% in March, the lowest since 2009. However, core inflation is still at 0.8%, higher than the lowest point. This was probably the reason not to make a move: no negative deposit rate. On the other hand, Japan ignored deflation signlas until it was too late. The European recovery is advancing very slowly and it remains fragile. For more, see the  preview:  ECB cheat sheet – 4 scenarios. There is another very big event this week, the most important event: Non-Farm Payrolls. See how to trade the Non-Farm Payrolls with EUR/USD.