The EUR had a week which can best be described as “buy the rumour, sell the fact” or, as your author more rhythmically prefers it, “buy the mystery, sell the history”. The mystery, of course, was the second ECB Council Meeting of 2018 on Thursday, and whether President Draghi would be changing the language around QE and the withdrawal of some degree of monetary stimulus. The EUR had a two-stage reaction to the ECB Council meeting. Initially, EUR/USD spiked almost half a cent higher but by the end of Thursday afternoon it had fallen more than a full cent from the high to just 1.2320 and by Friday morning it was back down on a 1.22 big figure before more general USD weakness helped it climb back on to 1.23.
In its opening Statement, the ECB removed its previous pledge to increase its asset purchase programme (APP) in size or duration should the economic outlook becomes less favourable, taking away what had been its most explicit ‘easing bias’. This signaling prompted a wave of buying for the EUR. We have said many times that Mr Draghi is a master of managing market expectations and this meeting showed him on top form. In his Q+A session, he downplayed the significance of this move, calling it “a backward-looking move without signals for either our expectations or our reaction function.” He also stressed the Statement’s line that an “ample degree of monetary stimulus remains necessary for underlying inflationary pressures to continue to build up to support headline inflation developments over the medium-term.” Traders quickly changed tack, and the EUR more than reversed all its earlier gains. Mr Draghi can certainly look back at the Press Conference as a job very well done: changing the communication in a less dovish direction whilst pushing the EUR simultaneously lower.
For the week ahead, a central bank which claims only to be driven by the inflation outlook will be watching carefully the final German CPI numbers on Wednesday and those for the wider Eurozone on Friday. There are plenty of Central Bank speakers, too, with President Draghi, Vice President Constanciao and Chief Economist Peter Praet all on Wednesday. Often, the week after an ECB Council meeting is one where monetary officials try to recalibrate any unwelcome market movements or policy expectations but this time around there’s no need at all for that. They’ll all be very happy with currency and interest rate movements since last Thursday’s Press Conference. The euro opens in Asia today having ended the week at USD1.2305, AUD/EUR0.6375 and NZD/EUR0.5915.