Overview of ECB meeting and some thoughts on Dollar U-turn
Crystal clear on outlook, vague on measures
Despite rumors about overly strength of the common currency, Draghi did not involved himself in talking down its growth. There was a twisted cue though that recent euro pickup forced to cut inflation forecasts - from 1.5% to 1.2% in 2018. Draghi’s out-of-the-box take on basic concern led to investors dismissing traditional bearish call that the economy still needs significant stimulus. Traders instead added more longs on euro thanks to relatively tepid reaction of Draghi to its recent dynamic. I note that he did not mention the favorable wording that euro gains, at least in part, are fundamentally justified. Asked by the journalist whether the ECB is concerned about the strengthening of the euro and whether the bank sees it as a threat to growth, Draghi said that exchange rate is very "important,” but it has not yet translated into growth forecasts. In 2018, the ECB predicts economic growth at 1.7%, and the forecast has not changed since the last meeting.
Obviously, by strengthening its position of being idle in relation to the growth of European currency, Draghi leaves problems for later, which will have to be pay "with interest". Extended currency revaluation will certainly press on inflation and at some point the economy can lose the precious impulse from QE and withdrawal will not come easy. Draghi decided to use the last attempt to delay the moment of truth, but will fully return to the issue of QE reduction already in October. He stated this at the conference saying that most of the changes in the asset buying program will be announced next month.
Having received an "informal permission" from Draghi, the European currency quickly surmounted the 1.20 barrier against the dollar, but the ECB president did not lure large buyers since the meeting, as evidenced by today's upward dynamics of EURUSD, rather unhurried, apparently dictated by the sellers of US currency. Fisher resignation raised doubts about the independence of the Fed in future, as leadership may be filled with loyal Trump candidate advocating his needs - a weak dollar, incentive measures, deregulation. Fischer was the leading hawk in the leadership, so the chances for the Fed's December transition to a new rate are falling sharply. The US macro statistics proved to be rather unconvincing for the influential Fed representative, Lael Brainard, who called the regulator to step out of the hike path and wait for inflation to get closer to target level.
The dollar index touched 91.00 today during the Asian session. The next target is 90.00. Especially strong sales were felt on the pair USDJPY, which lost 0.7%. The pound sterling grew by 0.3%, leaving behind the 1.31 mark against the dollar.
The turn is around the corner
Strangely enough, to help a strong labor market in the US, in an attempt to unravel the riddle of inflation may come .. a weak dollar. Sentiments letdown on US currency could be solution to its future gains along with inflation. Some representatives of the Federal Reserve expect this, and William Dudley, who has the right to vote in the committee, hinted openly about this. On Thursday, he said that the Fed should continue to raise rates despite sluggish price increases. Allowing himself to be more cautious in the statements he no longer claimed that he expected three increases this year. Since the beginning of the year, dollar has lost about 10%, which on the whole can bring the economy about 0.4% - 0.5% of additional inflation, leading it to a key level. It remains to be seen how brave is Janet Yellen to take decisions in high uncertainty environment. Probably she will point to the data-dependence of the Fed and give dollar to fall a little more, using devaluation factor to the maximum. However, it is still too early to dismiss the December increase.
Arthur Idiatulin
Despite rumors about overly strength of the common currency, Draghi did not involved himself in talking down its growth. There was a twisted cue though that recent euro pickup forced to cut inflation forecasts - from 1.5% to 1.2% in 2018. Draghi’s out-of-the-box take on basic concern led to investors dismissing traditional bearish call that the economy still needs significant stimulus. Traders instead added more longs on euro thanks to relatively tepid reaction of Draghi to its recent dynamic. I note that he did not mention the favorable wording that euro gains, at least in part, are fundamentally justified. Asked by the journalist whether the ECB is concerned about the strengthening of the euro and whether the bank sees it as a threat to growth, Draghi said that exchange rate is very "important,” but it has not yet translated into growth forecasts. In 2018, the ECB predicts economic growth at 1.7%, and the forecast has not changed since the last meeting.
Obviously, by strengthening its position of being idle in relation to the growth of European currency, Draghi leaves problems for later, which will have to be pay "with interest". Extended currency revaluation will certainly press on inflation and at some point the economy can lose the precious impulse from QE and withdrawal will not come easy. Draghi decided to use the last attempt to delay the moment of truth, but will fully return to the issue of QE reduction already in October. He stated this at the conference saying that most of the changes in the asset buying program will be announced next month.
Having received an "informal permission" from Draghi, the European currency quickly surmounted the 1.20 barrier against the dollar, but the ECB president did not lure large buyers since the meeting, as evidenced by today's upward dynamics of EURUSD, rather unhurried, apparently dictated by the sellers of US currency. Fisher resignation raised doubts about the independence of the Fed in future, as leadership may be filled with loyal Trump candidate advocating his needs - a weak dollar, incentive measures, deregulation. Fischer was the leading hawk in the leadership, so the chances for the Fed's December transition to a new rate are falling sharply. The US macro statistics proved to be rather unconvincing for the influential Fed representative, Lael Brainard, who called the regulator to step out of the hike path and wait for inflation to get closer to target level.
The dollar index touched 91.00 today during the Asian session. The next target is 90.00. Especially strong sales were felt on the pair USDJPY, which lost 0.7%. The pound sterling grew by 0.3%, leaving behind the 1.31 mark against the dollar.
The turn is around the corner
Strangely enough, to help a strong labor market in the US, in an attempt to unravel the riddle of inflation may come .. a weak dollar. Sentiments letdown on US currency could be solution to its future gains along with inflation. Some representatives of the Federal Reserve expect this, and William Dudley, who has the right to vote in the committee, hinted openly about this. On Thursday, he said that the Fed should continue to raise rates despite sluggish price increases. Allowing himself to be more cautious in the statements he no longer claimed that he expected three increases this year. Since the beginning of the year, dollar has lost about 10%, which on the whole can bring the economy about 0.4% - 0.5% of additional inflation, leading it to a key level. It remains to be seen how brave is Janet Yellen to take decisions in high uncertainty environment. Probably she will point to the data-dependence of the Fed and give dollar to fall a little more, using devaluation factor to the maximum. However, it is still too early to dismiss the December increase.
Arthur Idiatulin
This analysis is provided as general market commentary and does not constitute investment advice. Past performance is not indicative of future results
