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EUR: Nothing to offset dovish signals from Draghi - BBH

FXStreet (Delhi) – Research Team at BBH, suggests that there is no data from the eurozone that could offset the powerfully dovish signals by ECB President Draghi ahead of the weekend.

Key Quotes

“That it will "do what it must" will go down in the Draghi lexicon. There were two elements for investors. First, the staff forecasts are important. They inform officials where it stands relative to its target. The forecast for inflation will likely show that the ECB medium term inflation target is unlikely to be reached. What follows from this is that the ECB has to do more to satisfy its mandate.”

“Second, Draghi emphasized that all of its tools will be used to achieve its goals. There are four relevant ones: the length of the program, the pace of purchases, the composition of those purchases, and the deposit rate. Draghi suggested that a lower deposit rate could facilitate the efficiency of the asset purchase program.”

“The September 2016 end-date was never very hard, so its movement would be a small concession. The ECB could increase its purchases by around 20 bln euros to 80 bln a month. Increasing the number of agencies that qualify for QE are already gradually taking place, but to buy sub-sovereign debt would be a new step. In particular, given the relative market developments, this would free up more German assets that could be purchased. Initially, talk centered on a 10 bp cut in the deposit rate, but to get ahead of the curve, a larger move may be necessary. There is increasing talk now of a 20 bp cut.”

“The flash November PMI, money supply and lending figures, and Spanish preliminary CPI do not have the heft to alter the ECB's assessment. The region's composite PMI and GDP have been remarkably steady recently. Lending growth has picked up modestly, but it remains anemic. Spain has been experiencing deflation, but the economy's strength has been among the best in the region. Deflation pressures may have eased. It will likely have little consequence. Focus is on Catalonia's push for independence and next month's elections.”

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