FXstreet.com (Barcelona) - Last October, we set out our views on the evolution of the single monetary policy in 2013. “In line with our macroeconomic forecasts, our base case was for unchanged ECB policy rates throughout 2013 (and indeed to the second half of 2015). The biggest risk we identified to this view came not from further weakness in economic activity (whether in the periphery or the core) or even the emergence of growing deflationary pressures.” notes the Economics Research Team at Goldman Sachs. Rather, we saw the most likely driver of a rate cut as being a brutal appreciation of the Euro exchange rate (to employ the language of former ECB President Trichet).

Recent developments have supported this framework. First, we (and markets) interpreted ECB President Draghi’s remarks at his January press conference as a signal that official rates are on hold for the coming months. The immediate focus of the ECB’s attention is to maintain progress with the reactivation and reintegration of credit markets so as to re- establish effective monetary policy transmission to the periphery, where the need for further stimulus is greatest.

Second, “talk of ‘currency wars’ – although hyperbolic, in our view – is now all the rage. As other leading central banks adopt more expansionary policies, the danger emerges that the ECB’s deeply-rooted relative conservatism will lead to a strong Euro appreciation, weighing on exports and growth while fuelling potential downside risks to price stability.” they warn.