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Yet again, the ECB left all rates unchanged and left the drama for the press conference. Recently, the “green” recovery as Draghi said, seems somewhat fragile. And more importantly, inflation continues falling and is getting further away from the ECB’s 2% target. However, Draghi didn’t seem too concerned, and found explanations for this. An LTRO is also on the cards but not now, and the link to excess liquidity has been deflected by Draghi. Letta’s political victory in the Italian parliament somewhat stole the show from Draghi. EUR/USD ends the press conference at a much higher level.

Here is the live blog of the event that sent EUR/USD above 1.36, as it happened.

Highlights

  • No new measures, but ready to act, including interest rate and LTRO.
  • Slow growth, downside risks, remain
  • Activity subdued.
  • No change on inflation stance – inflation advancing as expected.
  • External event boost euro – Letta wins confidence vote in Italian parliament.
  • Question about the exchange rate remains unanswered.
  • No stable relation between this figure and short term money market rates
  • Euro-zone is more resilient to political instability.
  • EUR/USD climbs above 1.36

Live Blog

  • 12:23 GMT: All times are GMT.
  • 12:23 ECB rate decisions are usually held on the first Thursday of the month. The special event is due to a holiday tomorrow in Germany. The ECB is based in Frankfurt.
  • 12:23 You can watch the press conference live here.
  • 12:23 ADP in the US disappointed with +166K. This sends EUR/USD higher before Draghi begins talking.
  • 12:25 EUR/USD fell due to the Italian political crisis, that seems to be close to a resolution now.
  • 12:29 The event is held in Paris this time.
  • 12:30 Draghi is awaited. In the meantime, EUR/USD stabilizes around 1.3525.
  • 12:31 There seems to be some kind of delay. Draghi is still not in the room.
  • 12:32 Draghi will certainly be asked about the political crisis in his own country, Italy, but he isn’t likely to answer.
  • 12:33 Draghi is in the house. Let the games begin.
  • 12:34 Draghi says incoming information have further underpinned the previous assessments. Price pressures expected to remain subdued. Credit dynamics remain subdued. Inflation firmly anchored according to mandate.
  • 12:35 Expected gradual improvement in activity from low levels. Monetary policy geared to be loose, supporting a gradual recovery. Accommodative for as long as necessary, in line with forward guidance presented in July.
  • 12:36 Subdued dynamics remain unchanged. The council will continue following closely. Ready to consider all available instruments.
  • 12:37 Unusaully adverse weather conditions also contributed to weakness. Somewhat weaker growth in Q3 support forecast of a gradual recovery.
  • 12:38 Output expected to recover at a slow pace.
  • 12:39 Improvement in financial markets and future exports should support growth. However, unemployment remains high.
  • 12:40 Risks remain on the downside.
  • 12:41 Annual inflation are expected to remain at low levels.
  • 12:41 EUR/USD rises to above 1.3540 as Draghi presents no upcoming new measures – a relief.
  • 12:42 In Italy, Enrico Letta wins confidence vote, and this also pushes the euro higher.
  • 12:43 Essentail that fragmentation will be reduced and that banks will be stable.
  • 12:44 EUR/USD already at 1.3555.
  • 12:45 Governments should keep their fiscal houses in order. The 2pac should also help discipline.
  • 12:46 Reforms in labor markets should help competitivenes.
  • 12:46 Questions begin
  • 12:46 Question about the exchange rate.
  • 12:47 There was a discussion about a rate cut.
  • 12:48 “Vast array of instruments” regarding LTRO.
  • 12:49 EUR/USD conquers 1.3570.
  • 12:50 What would trigger a rate cut?
  • 12:52 Regarding inflation: it is advancing as expected. Draghi doesn’t seem to be worried, but they will “monitor closely”.
  • 12:52 Ready to act on interest rate or use other tools if necessary. ERU/USD rally seems to have stabilized.
  • 12:53 What about the stress tests?
  • 12:54 We hope that credit will recover.
  • 12:55 There are many definitions of non-performing loans. We will have to harmonize these definitions and be rigorous.
  • 12:56 Guidelines intended to be transparent and rigorous. Shedding light on the banking system will have a positive effect.
  • 12:57 Many economists think the euro is overvalued.
  • 12:58 Another question about the exchange rate – answer: the regime is of a floating currency.
  • 12:59 Question about the US: it is a risk if protracted. The impression is that it will not be so.
  • 13:00 On excess liquidity: the 200 billion figure was given in a different context – no stable relation between this figure and short term money market rates.
  • 13:01 But, state of fragmentation has an important role. You can easily expect a lower level with lower fragmentation.
  • 13:02 in short: don’t tie excess liquidity with LTRO.
  • 13:03 Ready to act on LTRO if needed. No specific hints.
  • 13:03 Nobody wants a liquidity accident between now and the recovery, but it shouldn’t be an alternative to capital.
  • 13:04 ECB talks about the Single Supervision Mechanism and the SRM, using clause 114. EUR/USD contiues higher.
  • 13:05 Q: What is the lower inflation bound to which the ECB responds?
  • 13:06 The full array of instruments is needed. No new guidance on that.
  • 13:07 Energy prices, food prices, taxes and the exchange rate impact inflation.
  • 13:08 Growth is uneven.
  • 13:09 Question about Italy.
  • 13:10 While instability may be hampering specific countries, it doesn’t endanger the euro-zone. The zone is more resilient today.
  • 13:11 Euro-zone governance has progressed during 2012.
  • 13:12 Q: How is France doing?
  • 13:12 The assessment of France is that significant progress has taken place and more needs to be done.
  • 13:15 Credit flows remain very weak. Reduction in the dispersion of lending rates are marginal.
  • 13:16 High risk aversion is important and weighs. As the reovery extends and monetary policy finds its way to the economy, the funding side will have a reduced role. The ECB will continue providing liquidity as needed.
  • 13:18 German politics aren’t expected to impact banking union.
  • 13:20 Interest rates did move. EUR/USD moves closer to 1.36.
  • 13:21 Market pressure is one of the pressures to reform.
  • 13:22 Draghi reminded about ECB letter to Berlusconi two years ago, but doesn’t really answer.
  • 13:23 EUR/USD breaks 1.36 but doesn’t hold on to this level so far.
  • 13:24 The crisis isn’t moving from small to big countries. Unemployment stabilizing at high levels.
  • 13:25 Non-elected officials want faster action than the current speed.
  • 13:27 The Netherlands have show capacity to overcome crises.
  • 13:28 Are the European elections a “stress test” for Europe? No answer.
  • 13:28 More needs to be done in France and everywhere.
  • 13:30 Spanish banks are making progress. It seems that Spain will approach this exercise well.
  • 13:30 EUR/USD climbs above 1.36 again.
  • 13:32 Stress tests need to be transparent and rigorous.
  • 13:33 Plurality of actors in the stress tests will help.
  • 13:34 Are you worried about the anti-euro parties? Answer: we should certainly be alert to these expressions in popular vote: fostering the recovery, creating jobs and more reforms. The ECB should keep providing price stability and governance should continue.
  • 13:35 Press conference ends.

Background

In a recent testimony, Mario Draghi said that another LTRO is certainly possible. Excess liquidity is dropping and no one wants the financial system to be clogged. In addition, after the German elections are behind us, the central bank might feel more free to act.

For more, see the Euro USD forecast.

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