Home Did Draghi make a critical mistake with forward guidance?

Did Draghi make a critical mistake with forward guidance?

The ECB  made history with a negative despot rate, introduced a wide array of steps and even talked about potential buys of assets. One of the measures is the TLTROs –  targeted loans to aid the real economy.

But one  mistake could keep the euro strong and thus weigh heavily on the real economy.

Update:  EUR/USD rallies as forward guidance backfires

The ECB  tweaked its forward guidance regarding lower rates. It used to commit to  current low rates or lower for a long time, and now it is only current low rates for a long time. The central bank removed the option to lower the rates.

If this tweak wasn’t clear, Draghi explained it in a response to a question: “For all the practical purposes, we have reached the lower bound”. This comment counters the promise to do more and also counters the impressive array of measures.

It’s hard to understand why Draghi would prefer to do something like that and not leave the door open to further cuts – further cuts would become unnecessary with stronger guidance and a lower  exchange rate.

While EUR/USD is not going up at the moment, its fall is limited and it could recover afterwards, despite all the negativity.

Here is the full coverage of the ECB press conference.

By  closing the door on  lower rates, EUR/USD and EUR/CNY could rise, more than countering the huge TLTROs.


Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.