ECB: Draghi takes a breather

The biggest news from the Draghi press conference today wasn’t the finer points on last month’s new policies; instead it was the change in schedule for the ECB’s meetings. From 2015 the meetings will be held once every 6 weeks, and the bank will also release the minutes from the meetings for the first time.

The timing of the meetings is more in tune with the Fed, leaving the BOE as the only other major central bank to hold monthly meetings. In fairness, it makes sense that Draghi cuts back on the meetings, firstly, the economy does not usually move fast enough to warrant meeting monthly, also the central bankers must barely have time to get any actual work done before they have to turn around and head off to another meeting. While it may look like the European central bankers are work-shirking, it could mean that they do more to help their economies rather than simply prep for meetings.

The minutes are also an important development for the history of the ECB. For the first time we will find out exactly who votes for what and whether there are any disagreements or tensions at the bank. One has always suspected a lively debate at the ECB, now we will know exactly what goes on behind closed doors. The only downside is that we have to wait for January for until we get the first batch. It also strikes me that the ECB must be confident that the Eurozone sovereign debt crisis is behind us, as I am not sure the Bank would have wanted to publish minutes during sensitive discussions like how to bail out a currency bloc member.

In terms of new policy measures, there were none. The ECB still seems confident that last week’s measures will be sufficient to boost inflation. Here are the highlights from his presser:

• The moderate recovery in on-going.

• Medium to long-term inflation expectations remain “firmly anchored”.

• The bank is confident that TLTRO loans will work through the economy and “contribute to a return of inflation rates closer to 2%.”

• Draghi reiterated his Forward guidance that it will leave “interest rates at present levels for an extended period of time” unless the outlook for inflation dramatically changes.

• There were some expectations ahead of the meeting that Draghi could clarify how long rates may stay low, he dodged this question, which may be why we have only seen a moderate decline in EURUSD so far.

• Discussions about an ABS purchase plan are on-going, which suggests that an ECB-style version of QE is still some way off.

• Draghi mentioned that the currency is a concern; however he reiterated that the exchange rate will not be used as a policy tool.

The market reaction

The EUR is lower today, but that is not all due to Draghi’s press conference. The positive surprise in the US NFP number and the drop in the unemployment rate to its lowest level since 2008 also played a part. The dollar has rallied and Treasury yields are higher, however, EURUSD has managed to climb back above 1.36 as we close out the European session. Although the US jobs number is good, Draghi was too hesitant on pointing towards a future QE programme and too sanguine on the outlook for inflation, which he said should rise in 2015 and 2016, to push EUR marginally lower. We may need to get a change in tune from the Fed before we do that, and that seems unlikely. Fed chair Janet Yellen was speaking last night and said that the Fed could use macro prudential measures rather than rate hikes going forward, so it could take more than a fifth consecutive 200k+ reading of NFP to change her tune, and until she does Treasury yields could be capped at 3%, which may limit USD gains.

Overall, key support is still the June 26 low at 1.3576. On the upside, a break above 1.3676 – the 200-day sma, could trigger a further advance back to 1.3800.