In view of Elwin de Groot, Head of Macro Strategy at Rabobank, Mr. Draghi will have to be very careful in choosing his words tomorrow as after all, it took quite some effort after the March press conference to “put the market back in its cage” and this could prove even harder if the Governing Council would let go now and succumb to an ‘all lights are green’ view of the world.
Key Quotes
“First of all because the lights on (core and wage) inflation are not green at all (despite a likely uptick in April driven by Easter) and even in European (French) politics nothing should be taken for granted these days. Secondly, because they need to stay in control. Signalling a change in the forward guidance and fiddling with the risk assessment is by no means an easy task because the ECB should maintain sufficient flexibility to take a pause or even a step back. For, once they go down the route of tapering (followed by rate hikes), it may prove difficult to reverse course again.”
“Markets are very good at compressing a host of expected events expected to take place over a protracted period of time into one single market move and that is where the risk lies. Too much of a reaction in EUR (already trading at over 1.09) or in sovereign spreads could ultimately backfire. This, we think, is one reason for Mr. Draghi to keep his composure and try to resist pressures for changing their forward guidance and risk assessment too early in the game. QE was a marathon rather than a sprint; but any runner can tell you that the cooldown is equally important to prevent injuries.”
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