ECB stays the QE course, but euro doesn’t get the memo

Draghi and the ECB may have been dovish at today's meeting, however that hasn't stopped the euro from rallying to key resistance levels. Why is the euro rallying when the ECB is dovish? The reason is because there is nothing new from today's meeting, the ECB statement is virtually unchanged from last time and no news means no change in the euro's trend, which for now is higher.

The key takeaway from today's meeting is that a September taper announcement looks increasingly unlikely as the ECB said that a "very substantial degree of accommodation is needed" to boost inflation, and that the ECB's QE programme will run until the inflation rate picks up. Since core inflation remains at 1.1%, well below the ECB's 2% target rate, this suggests that QE has further to go. Indeed, the ECB stressed that it would increase its APP, which currently stands at EUR 60 bn a month, if the inflation picture deteriorated further.

An about-turn from Draghi

Draghi has well and truly rolled back on his "reflation" comments from last month that sent the trade-weighted euro to a 2-year high. We doubt that Draghi will be using that word again in a hurry, but if he was hoping that today's dovish press conference would ease the upwards pressure on the euro then he was wrong. It hasn't dented the prevailing trend higher, and EUR/USD is still on course to test key resistance at 1.1650 – the 2016 high, above here opens the way to 1.20. Right now Draghi appears content with the euro's strength, but if a strong currency starts to weigh on inflation even more then we could see some anti euro rhetoric start to pepper Draghi's speech, which may weigh on the currency, however that time has not yet come.

QE tapering on the back burner for now

We could also be some way from an announcement on tapering the ECB's QE programme after Draghi said that the ECB was unanimous in not setting a date for QE to end. Reports earlier this week stated that the ECB staff were working on a plan for QE, which could involve tapering, however, this meeting suggests that unless inflation picks up then tapering is on the back burner for now.

As we mentioned, this meeting's message is very similar to the last one, and no news means no change in trend. Draghi's tolerance of the stronger euro is also helping the single currency. Also worth watching is EUR/CHF, which is sensitive to ECB decisions. It has rallied strongly throughout Draghi's comments and is close to a 13-month high at 1.1073. Above here opens the way to 1.12, the high from April 2016.

Dollar also impacted

Ahead of this meeting we noted that the dollar index is sensitive to euro moves, and tends to have the second biggest reaction to a move in the euro after the Swissie. Today's euro surge is weighing on the buck, and the dollar index is currently 0.5% lower. Moves in the Dax index has been fairly erratic during the ECB meeting. The Dax, which has been moving inversely to the euro of late, tends to have the largest movement in reaction to euro moves out of the major indices. But, if we continue to see euro strength, this could weigh further on the German stock market.

Bonds in the euro area have declined on the back of the dovish tone to Draghi's press conference, with the peripheral countries experiencing the sharpest declines such as Italy, Spain and Portugal. This isn't impacting the euro, but could please the ECB who appear to be doing everything in its power to resist tighter financial conditions.

Overall, Draghi and co. shifted back to a dovish position at this month's meeting, which could supress volatility until the next major Draghi event – the Jackson Hole central bankers' conference on 24-26th August. Some expect Draghi to hint that QE tapering could be near, however, from the tone of today's meeting that now seems a stretch and the ECB could maintain QE for some time.