The euro was quietly trading in the USD1.1940’s in the European morning on Thursday, caught between the usual opposing forces of very strong economic data and worries about German politics. Then, at lunchtime, the ECB released its usually bland account of the last monetary policy meeting of the Governing Council. Buried deep in the report, the ECB dropped a bombshell on to financial markets. Bear with us here please as it’s a bit technical…
“The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year. In particular, as progress was made towards a sustained adjustment in the path of inflation, the relative importance of the forward guidance on policy rates would increase, as suggested by Mr Praet in his introduction. From this perspective, the Governing Council’s forward guidance framework would evolve naturally, in line with the established sequencing between the APP and interest rate guidance. It was suggested that the Governing Council’s communication should be adjusted gradually over time to avoid sudden and unwarranted movements in financial conditions.”
In plain English, the ECB had previously stuck with a public view that there is no need to change forward guidance for some considerable time and that a change in interest rates would not come until well after the end of QE (or the Asset Purchase Programme as it calls it). Indeed, the interest rate market was still not fully pricing an ECB rate hike until early 2019. But, if it is now saying it will need to alter its guidance, then the FX and interest rate markets jumped to the logical conclusion that this is the precursor to a shift in ECB interest rate policy. Hence, the EUR jumped from 1.1940 to a high of 1.2050 and to joint top of the one-day leader board with the NZD.
It will be interesting to see if they now follow through with the usual tactic of sending out “ECB sources” to try to row back on these new market expectations… For now, the EUR opens in Asia this morning at USD1.2035, AUD/EUR0.6555 and NZD/EUR0.6020.