Morning Commentary: ECB – No Action Today but Priming the Pumps

Foreign Exchange - Morning Commentary

ECB – No Action Today but Priming the Pumps

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The ECB surprised many economists and investors today in the market by leaving interest rates unchanged at their monetary policy meeting. However, it has certainly laid the groundwork for further monetary stimulus measures, perhaps as early as their September 12 meeting. ECB President Mario Draghi has been on the wires this morning and markets have careened back and forth as he has vacillated from extremely dovish comments to more neutral comments.
Markets have whipsawed and reversed course due to his first comments about continuing economic weakness, inflation remaining below target levels, and promising more monetary stimulus down the road. The initial reaction to his comments sent the euro to a 2-year low near $1.1100 and sent German 10-year yields to a new low of -0.42%.  The euro had already been under pressure due to a much weaker than expected German Business Climate report (see below).
History has shown that when ECB President Draghi has his press conferences, there have been times when his words and language have shifted gears from his opening statements to his closing, and today was no different. While his opening comments were clearly very dovish, his follow up comments were less so. He does not see the EZ economy slipping into recession and stated that any further interest rate cuts will come with mitigating measures. He also stated that the next leg of stimulus has to be fiscal to support EZ growth. Markets have completely reversed course, EZ interest rates are back in positive territory, and the euro has made new highs for the session.
Markets are now less certain about the course of future ECB monetary policy but still tilting toward further monetary policy stimulus next month. ECB President Draghi’s term expires in three months and then IMF Chief Christine Lagarde will take over the helm of the ECB.  Perhaps the ECB decided to take no action at this time in order to recalibrate their actions based on what the Fed does next week. Until then, expect the euro to resume its broad consolidative pattern.
  • The key German IFO Business Climate Index for July came in much weaker than forecast at 95.7 against expectations of a 97.2 print which was nearly unchanged from June. Both the expectations and current assessment components fell sharply.
  • The Central bank of Turkey surprised almost everyone today by cutting interest rates by 425 bp from 24% to 19.75%. With a new head of the central bank and kowtowing to President Erdogan wishes for lower interest rates, the new head has taken bold action to start his tenure. This is the first rate cut for Tukey since 2016 and is the biggest rate cut in 17 years. With CPI declining from its 15% level earlier in the year to near 11%, the central bank decided to act boldly. Turkish markets have taken it in stride with the Turkish Lira near unchanged.
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