Draghi Exposes Demand for Rate Cut – EUR/USD Falls

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After the ECB left the rates unchanged once again, president Mario Draghi faced the press and gave a statement regarding the current situation. A half hint of more demand for a rate cut in the press conference sends EUR/USD significantly lower. Draghi provided quite a few interesting quotes.

Draghi is expected to give some hints about a future cut, perhaps in January, and is widely expected to present lower forecasts for growth and inflation. Live Blog of the Event.

Highlights

  • GDP Forecasts are lower for 2012-2014, but recovery coming in 2013.
  • Inflation forecasts for 2013 are lower.
  • Borrowing to banks to continue.
  • Wide discussion on rate cut – a hint for a cut.
  • No decision on rolling Greek bonds.
  • Highlights drop in bond yields since the summer, thanks to the OMT.
  • It’s pointless to begin from a eurobond. “I issue and you spend”. Trust needs to be restored beforehand.
  • In addition, a negative deposit rate was mentioned: “We are operationally ready, but the discussion didn’t go into any depth with respect to this point. We briefly touched upon the complexities that such a measure would involve and possible unintended consequences, but we didn’t elaborate any further” – This is also euro-negative.

Update: EUR/USD extends the fall and breaks below 1.30.

The next event: EUR/USD: Trading the US Non-Farm Payrolls

Live Blog

13:15 GMT. Press conference begins at 13:30, All times are GMT.

13:16 EUR/USD now trades around 1.3070.

13:23 Italian political turmoil weighs on the euro.

13:24 You can watch the press conference here.

13:26 At the same time, the US will release weekly jobless claims – A drop from 392K to 378K is expected.

13:30 Jobless claims drop to 370K. Good news.

13:31 Draghi is entering the room. Presser to begin very soon.

13:32 Press conference begins – EUR/USD at 1.3073

13:33 Draghi says that prices are high due to energy prices. Inflation to fall below 2% in 2013.

13:34 Inflation expectations remain firmly anchored.EUR/USD slides a bit.

13:35 In 2013, activity should gradually recover. Things will get better.

13:35 Financial sector restructuring should continue.

13:35 Market operations to continue as planned.

13:36 Real GDP declined by 0.1% in Q3 (as already known). Further weakness signal low activity in Q4, although financial market confidence improved.

13:37 Subdued foreign demand likely to continue at the beginning of 2013. Later on, stabilization of the financial system will help recovery.

13:38 -0.9 to +0.3% for 2013, 0.2%-2.2% for 2014.

13:39 Draghi blames the cliff. There are downside risks.

13:39 Underlying price pressures should remain moderate. Inflation 2.% in 2012, 1.1 to 2.1 in 2013 and 0.6 to 2.2% in 2014 – projection for 2013 revised downwards.

13:40 Higher oil prices push prices higher – nothing new.

13:41 Deposits in banks have increased. M1 and M3 on the rise.

13:42 Decline in loans to the private sector, but falling at a slower rate.

13:43 Heightened risk aversion weighs on credit demand. Segmentation of financial markets limit credit supply. Important to strengthen the resilience of banks.

13:45 Looking forward for genuine economic union.

13:46 EUR/USD a bit lower, to 1.3060. Questions begin.

13:46 No comment on specific Italian situation. Who is Draghi afraid of?

13:47 Where interest cuts discussed? There was a “wide discussion”.

13:49 OMT, since announced, already had a positive impact.

13:51 EUR/USD falls on “wide discussion” on rate cut – a potential cut next month.

13:53 Important to have a legal basis in place to do the next step to build the mechanism.

13:55 No decision on rolling over Greek bonds. EUR/USD falls even lower, to 1.3027.

13:57 Draghi mentions that business confidence improved in various countries. There are “conflicting signs”. EUR/USD stabilizes at 1.3033.

13:58 On Greece: a lot is asked from the public sector…

14:00 Too early to assess buyback program.

14:00 Question on Goldman Sachs. Draghi says there are no conflicts of interest.

14:01 Draghi says there is no conflict of interest.

14:02 LTRO avoided a major disaster.

14:03 The credit crunch that began in 2011 and was threatening to continue in Q1 2012, was avoided thanks to the LTRO.

14:04 We had to overcome fragmentation of the euro-area. EUR/USD now a bit higher, just under 1.3040.

14:05 Single Supervisory Mechanism – one should aim this mechanism covering all euro-zone banks in order to avoid fragmentation.

14:07 Tough question on Greece, “killer medicine”: I acknowledge the progress made by Greece on fiscal consolidation and structural reforms.

14:08 Is the ECB ready to activate the OMT on Italy? Answer: ESM participation necessary for OMT activation.

14:10 Tough question on unemployment: Draghi points the finger to the policies made before the crisis: banks not properly capitalized, governments’ policy, etc.

14:12 Q: Why are you highlighting the few positive figures? There is improvement in the financial markets, including stock markets. From July to today, some countries lost over 200 basis points in bond yields.

14:15 The creation of single supervisor should create a strong supervisor.

14:17 EUR/USD back down to 1.3030.

14:18 Another tough question: basically blaming the “Eurocrats” or taking over control from elected governments.

14:19 Question on Ireland: we welcome the new Irish budget. Draghi praises Ireland. The ECB cannot be viewed as doing any form of monetary policy.

14:21 The OMT conditions are very clear! (Draghi is getting angry).

14:22 OMT is meant to curb tail risk.

14:23 Question about legacy debt. Important that legacy assets will carefully be defined, for policymakers and banks. Legacy assets just a name.

14:24 There was a breach of trust between European countries.

14:25 It’s pointless to begin from a eurobond. “I issue and you spend”. Trust needs to be restored beforehand.

14:26 Press conference ends. Highlights updated.

Background

Most economic indicators pointed to more weakness in the euro-zone, and this already includes Germany. Draghi specifically said that Germany is now beginning to feel the crisis.

Today it was finally confirmed that the euro area is in an official recession. The unemployment rate continues rising, with Spain and Greece seeing unemployment cross the 25% line.

Also inflation is easing, but probably not enough for a rate cut at this moment. In previous events, Draghi said that the rate of inflation is expected to drop in 2013.

For more on the euro, see the euro to dollar forecast.

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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.