New realities, new action

Before the ECB's September meeting, each word uttered by the ECB's Mario Draghi could provoke market swings. Its because the expectations for the fate of QE have already accumulated a critical mass, which simply needs a way out. In light of the announcement that the speech of the head of the ECB in Jackson Hole will ignore monetary policy, the Draghi's speech in German Lindau was particularly notable, where he gave a speech before Nobel laureates and young economists. Speaking about the fundamental necessity of adaptation to new realities, where the usual interconnections may already be inactive, the chief economist of the eurozone probably veiledly announced that large-scale credit support had exhausted itself to achieve a key level of inflation. Summarizing the success of quantitative easing in the rehabilitation of the economy, he noted that the old paradigms are no longer suitable for explanations and officials should become “open-minded" to new theories. It is not difficult to guess that under the old paradigm, most likely he means the Phillips curve, the function of unemployment from inflation. Interestingly, with the growth of QE in the Eurozone and the US, unemployment steadily declined, but the effect on inflation was not so clear. Inflation in the US have a room for acceleration due to strong consumer sentiments and wages, but subdued after three rate hikes, then in the euro area, the negative yield of bonds and zero rates did help stimulate the industry, but mostly due to the devaluation of the euro and increased competitiveness of products on the world market. The rate of consumption, the main driver of inflation, is still sluggish, coupled with negative consumer confidence.

The fact that QE will continue to work on the labor market and the weakening of the currency is quite obvious, therefore, proclaiming a willingness to change Draghi probably has in view a retreat from large-scale stimulation. Therefore, no matter how Jackson Hole passed, Draghi will probably make the long-awaited step forward at the September meeting, so the euro opens the way to the top.


Arthur idiatulin, Tickmill Market Analyst

Comment:

Target has been achieved, as world central bankers took dovish direction during Jackson Hole.