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Draghi fired his bazooka into his own foot – Rabobank

FXStreet (Delhi) – Michael Every, Research Analyst at Rabobank, notes that Mr. Draghi took out his bazooka yesterday and fired it into his own foot.

Key Quotes

“It’s hard to believe the ECB would have expected cutting the deposit rate 10bp to -0.30%, extending QE to March 2017, reinvesting principal payments as they mature, and saying they will buy regional and local government debt too, would result in EUR/USD surging from 1.0524 to 1.0944, a four big figure move that rounds out a year of massive FX volatility nicely.”

“They probably also would not have expected 10-year Bund yields to jump 20bp on the day to 0.67% and Euro Stoxx to slump 3.6%. Yet such was their achievement. (Please see more comprehensive coverage from our intrepid ECBologist, Elwin de Groot.) Meanwhile, on what was already a “Believe it or Not” day in terms of volatility, the Farce-nancial Times released the wrong ECB rate verdict on its website several minutes early, before shame-facedly retracting.”

“Of course, one can make the valid case that in light of better-than-expected economic data (CPI aside), the ECB were right to avoid increasing QE this time. Nonetheless, the severe market reaction underlines that in the ‘new normal’, no good deed goes unpunished. By trying to avoid exacerbating currency wars with more QE, the ECB has merely become a victim rather than a victor.”

“It will be interesting to see how the Euro economy and inflation expectations hold up to a spike in rates, a spike in the EUR, and a fall in stock prices. The risks must be that the ECB is dragged back into doing more at a later stage when the damage has already been done.”

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