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EUR undermined by dovish speech from ECB President Draghi – BTMU

FXStreet (Barcelona) - Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ notes that euro remained at weaker levels in the Asian trading session after falling sharply on Friday following a dovish speech from ECB President Draghi before the European Banking Conference.

Key Quotes

"In his speech, President Draghi described in context the significant shift that has taken place in ECB monetary policy since last September and how their new instrument of asset purchases operates."

"The inflation environment was described as “increasingly challenging” highlighting that he is particularly concerned that a too prolonged period of inflation becomes embedded in inflation expectations. Indicators of inflation expectation over the shorter horizon were described as “excessively low” although long-term indictors were on the whole described as still consistent with price stability”."

"He reiterated that “if on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we could step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases”."

"The market has interpreted the comments as signalling that there is higher likelihood of the ECB implementing sovereign debt QE although there was no specific reference to it in the speech". As a result the yields on 10-year Italian and Spanish governments both declined by around 10 basis points on Friday, and EUR/USD fell sharply from around 1.2550 to just below the 1.2400-level."

“Overall, the speech was consistent with our view that the ECB will likely continue to ease monetary policy which will remain a weight on the euro in the year ahead. However, the short-term euro sell off following the speech could prove to be somewhat of an overreaction."

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