Will the Easter Bunny bring QE to the ECB?

This month’s ECB meeting was one of two halves regarding market sentiment. At the start the market took the ECB decision as a hawkish sign that the Bank is likely to be on hold for some time, however, a deeper look at Mario Draghi’s statement suggested that the Bank has started to up the rhetoric about the potential for further easing.

A shift to the dovish side of the fence

Comparing the April statement with the March statement there has been a clear shift in tone at the ECB. In the March statement only one line was dedicated to the ECB’s forward guidance and potential for further policy action; however at today’s meeting a whole paragraph was used to highlight the Governing Council’s “unanimous” commitment to also using “unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.”

While in March the Governing Council remained “firmly determined to maintain an accommodative stance of monetary policy,” this month the bank is “resolute in its determination” to keep an easy stance of monetary policy. Although it is only subtle, the use of the word resolute suggests that the Bank may be getting its bazooka ready once again.

Draghi talks down the EUR

A firmer commitment to potential further easing is the message that the market is running with this afternoon, which is boosting European stocks and weighing on the EUR, EURUSD has reached a low of 1.3710 so far, its lowest level for 6 weeks. The next support level to keep an eye on is: 1.3664 – the 61.8% Fib retracement of the Feb – March advance. A break below this level would be a very bearish development for the single currency and could potentially open the way back to the psychologically important 1.35 zone.

Draghi managed a careful balancing act during today’s press conference. He acknowledged the continued improvement in the economic outlook, but also managed to divert attention to the weak price pressures and thus limit EUR upside. The moment he mentioned the potential for QE, the EUR dropped like a stone. What is interesting about the statement is that the ECB said that it will do whatever is in its mandate to cope with a period of prolonged weak inflation. However, in the past some members of the ECB, particularly from Germany, have said that QE is out of limits as it is not mandated for the ECB to print money. Has there been a change of heart, or is the ECB’s “QE” more theoretical than real at this stage?

Can the ECB pull the Easter bunny out of the hat?

Overall, while the ECB mentioned that a period of prolonged weak price pressures was to be expected, if inflation does not pick up in April then we could see further action from the ECB at the May meeting. Draghi tried to reason away the 0.5% rate for March inflation saying that it was down to softer food and energy prices and also the timing of Easter, thus the ECB may need to pull the Easter bunny out of the hat this month, otherwise it may be forced to put its QE money where its mouth is in a few weeks’ time.

This makes the April CPI estimate, released on 30th April, the most important statistic for EUR traders this month. Another decline could see the ECB take action and the bottom fall out of the single currency.

The market impact:

We mentioned in our ECB preview HERE and in our technical view HERE that there could be room for further downside in EURUSD. As we approach the European close in Europe, EURUSD is testing the 1.3700 handle. A break below 1.3664 – the 61.8% Fib retracement of the February – March advance, is a bearish development that could open the way to 1.3562, the February 12 low.