What was shaping up to be a potentially lively ECB announcement and press conference following yesterday’s draft staff projections leak, instead ended up being another relatively dull affair, despite the leak itself turning out to have some credibility.
The central bank made every effort to retain a relatively neutral stance overall, balancing any hawkish or dovish statement with something roughly equal and opposite. The fact that it no longer expects interest rates to remain at present "or lower" levels is a clear deliberate signal that policy makers are gradually becoming more hawkish and yet it also claimed that they could increase the asset purchase program or continue until the end of 2017, or beyond, if necessary. Equally, the ECB did, as reported yesterday, raise growth and lower inflation forecasts but put the latter down to oil price movements. It was the change in inflation expectations that triggered yesterday’s selling and triggered some weakness today – alongside the removal of "or lower" – but overall, the message was broadly neutral.
EURUSD fell quite hard following the statement and in response to the inflation forecasts but did recover after finding strong support around 1.12, a level which roughly represents the low from yesterday, last Friday and last Thursday. A proper break through this level would be quite significant, possibly triggering a move back towards the bottom of the channel.
The result of all of this is that I still expect the ECB to announce further reductions in bond buying once the current expires at the end of this year, while hinting at such a move in September. The euro may be a little weaker on the back of the meeting at the moment and did see some volatility, but broadly speaking we’re no wiser than we were prior to the meeting and expectations remain the same. A careful and considered performance as ever from Mr Draghi.
