- ECB’s president Draghi had a slightly dovish stance at today’s ECB meeting where the most important message was ‘the QE programme must be fully implemented to work’.
- Added to this, Draghi killed the debate about cutting the deposit rate further, as he twice during the Q&A session clearly said, that the ECB will not cut the deposit rate. As the option is now out of the question, the short-end of the euro curve reacted by increases of 1-2bp in both Euribor contracts and Eonia market.
- Regarding scarcity of bonds, Draghi argued that these concerns were premature and to illustrate this point, he argued the ECB is only ‘1K into its marathon’ when it comes to implementation of the QE programme.
- The EUR govie market has reacted immediately with a broad based rally led by the periphery. The yield in 30Y Italy has dropped 7bp and both 10Y and 30Y Germany is hitting new lows of 12bp and 55bp, respectively, but also following the UST rally from the weak US industrial production released during the press conference.
- Draghi repeated the ECB will look through unexpected inflation outcomes and maintained the focus on a sustained increase in inflation regarding a halt to the purchases. Although Draghi said the reaction function has not changes, our interpretation is that the ECB focuses more on core inflation and that it will accept an increase in inflation if it is driven by higher oil prices. There is still too much slack in the labour market for wage growth and core inflation to increase.
- Regarding the economic outlook Draghi repeated that the risks remain on the downside, but he added a more hawkish comment as he also said ‘the risks have become more balanced and have diminished’. But this should not result in a halt of the purchases as the ECB’s projection is based on full implementation of the QE programme.
- Note the ECB has expanded its list of agencies whose bonds are eligible for purchases under the QE programme. The extension should not reflect the ECB is searching for more bonds to purchase, as it was planned that the initial list could be amended.
Recommended Content
Editors’ Picks
AUD/USD could extend the recovery to 0.6500 and above
The enhanced risk appetite and the weakening of the Greenback enabled AUD/USD to build on the promising start to the week and trade closer to the key barrier at 0.6500 the figure ahead of key inflation figures in Australia.
EUR/USD now refocuses on the 200-day SMA
EUR/USD extended its positive momentum and rose above the 1.0700 yardstick, driven by the intense PMI-led retracement in the US Dollar as well as a prevailing risk-friendly environment in the FX universe.
Gold struggles around $2,325 despite broad US Dollar’s weakness
Gold reversed its direction and rose to the $2,320 area, erasing a large portion of its daily losses in the process. The benchmark 10-year US Treasury bond yield stays in the red below 4.6% following the weak US PMI data and supports XAU/USD.
Bitcoin price makes run for previous cycle highs as Morgan Stanley pushes BTC ETF exposure
Bitcoin (BTC) price strength continues to grow, three days after the fourth halving. Optimism continues to abound in the market as Bitcoiners envision a reclamation of previous cycle highs.
US versus the Eurozone: Inflation divergence causes monetary desynchronization
Historically there is a very close correlation between changes in US Treasury yields and German Bund yields. This is relevant at the current juncture, considering that the recent hawkish twist in the tone of the Federal Reserve might continue to push US long-term interest rates higher and put upward pressure on bond yields in the Eurozone.