Divergence between Draghi’s Outlook and Actual Data

September 17, 2018

| Fullerton Markets

Divergence between Draghi’s Outlook and Actual Data

If both the euro’s CPI and PMI were to surprise to the downside, short EUR/USD?

President Draghi reaffirms ‘balanced’ outlook despite cutting growth forecast

The European Central Bank (ECB) kept its benchmark interest rates unchanged last Thursday which was widely expected. More importantly, investors are not expecting to see a rate hike anytime soon as ECB has decided to keep interest rates at the present level at least through the summer of 2019. Nevertheless, the forward guidance by President Draghi during his press conference was of the utmost importance.

ECB will keep the exit plan of QE unchanged. However, after three years of money printing, the ECB has decided to end net bond purchases by the end of 2018. Thereafter, the ECB will reinvest the maturing bonds it has purchased so as to constantly keep €2.5tn afloat in eurozone’s capital markets.
Interest rates to remain unchanged at least until summer 2019, or for as long as necessary to ensure the sustained convergence of inflation to levels that are below, but close to, 2% over the medium term, according to Draghi. This gives him a strong argument to maintain the basic interest rate at zero level, even well after the summer of 2019 and possibly after he leaves the ECB next October.
ECB slightly lowered forecast of its growth projections for this year and next year for the eurozone, citing several growing risk factors. Draghi mentioned: “Uncertainties relating to rising protectionism, vulnerabilities in emerging markets, and financial market volatility have gained more prominence recently.” This could shake confidence in the market if economic data were to be a miss as compared to the robust economy that Draghi is expecting.

In summary, ECB’s key interest rate will remain at zero levels for at least the next 12 months or longer if necessary. This ‘way out’ may allow Draghi to argue for zero interest rates well after he is to release the reins on the ECB. At the same time, the ECB will keep flowing €2.5tn of printed money. We feel that overindebted member states of eurozone will fall behind and the interest rates could remain low for an even longer term.

Our Picks

EUR/USD – Slightly bearish.

This pair could hit 1.1550 if euro CPI and PMI were to miss forecast.

EUR/USD