ECB Draghi said back on Feb 23rd that the upcoming March ECB meeting would be critical in its assessment of the euro zone economy due to the release of ECB staff’s first view of 2016, which will include projections of 2016 inflation. According to the most recent ECB survey of professional forecasters 2016 projections, they see EU harmonized inflation at 1.7% by the year of 2016, which is just a few fractions of a percentage point off the 2.0% official target… Assuming that CPI does go back to the target levels in 2016 based on current economic projections, it removes the need for ECB to cut rates further, which is positive for the Euro, at least that’s what the market feels at this time.
Furthermore, the most recent CPI data out of Euro Zone suggests that inflation has already reached bottom, which coincidentally confirms market speculation that perhaps ECB will not act anytime soon, at least not when inflation is ticking up. (Euro Zone Feb CPI YoY reading moves off 4-year lows at 0.8% vs. 0.7%).
However, with that being said, euro zone is still plagued with a fragile recovery, and according to Draghi’s testimony in front of the Council meeting in Brussels on Monday (March 3, 2014), there are still risks ahead:
Draghi Testimony Highlights:
In conclusion, while recent data out of Europe has shown improvements, ECB is likely to remain on a cautious path. With unemployment at 12% and inflation still uncomfortably low, ECB won’t shift its policy focus from accommodation to tightening. The upcoming ECB Meeting will probably not be as encouraging as the market is making it out to be, as I believe ECB would still “reiterate” to keep all options on the table, including further rate cuts and negative deposit rates. On a side note, based on past observations, Draghi has been playing the market by alternating between a dove and a hawk, and since last ECB Press Conference ended up with the EUR gaining a couple hundred pips, we may see EUR being sold off in this week’s ECB Press Conference… Just keep your fingers crossed :).
ECB Draghi: March ECB meeting would be critical in its assessment of eurozone economy…
March 3, 2014 by 1 Comment