Morning Commentary: The ECB: Forever Dovish

Foreign Exchange - Morning Commentary
The ECB: Forever Dovish
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Mario Draghi took over the helm of the ECB in November 2011, and he was endorsed by German newspapers as the “most German of all remaining candidates.” Little did anyone know how “un-German” he would become, delivering negative interest rates and QE.

While market expectations had gyrated back and forth from more dovish to less dovish for this ECB meeting, ECB President Mario Draghi remained true to his innate nature with one last attempt to reflate the EZ economy. As Mario Draghi’s tenure is coming to an end on October 31, he was able to convince the ECB board to cut interest rates again by 10 bps to -0.50% and return to QE with the duration of QE being open ended, sending a powerful message. The ECB also introduced a tiering system to help insulate banks from the impact of the negative deposit rate; EZ bank stocks are up sharply on this news.

In his post-meeting commentary, Mario Draghi made mention of numerous “prominent” downside risks. The ECB lowered growth and inflation forecasts for the remainder of this year and for next. Markets initially reacted sharply to the headlines, with EZ interest rates plummeting and the euro crashing, but have since moderated their responses. Markets will now shift their attention to the Federal Reserve next week and see if any of this dovish response by the ECB will influence the FOMC decision on September 18.
  • The U.S. has responded in kind to China’s goodwill gesture regarding the removal of some tariffs on U.S. goods. The White House will delay additional tariffs on Chinese goods from October 1 to October 15 out of respect for the 70th anniversary of the People’s Republic of China on October 1. China has responded with plans to purchase U.S. soybeans and pork. All goodwill gestures are positives leading up to the key meetings in October, but both sides are far from a comprehensive trade agreement.
  • The central bank of Turkey surprised the markets once again by cutting interest rates by more than expected. They cut interest rates by 325 bps from 19.75% to 16.50%. In the two most recent moves by the central bank, they have cut interest rates by 725 bps. Declining inflation was cited as the main reason for the sharp cut in interest rates; the Turkish lira has reacted positively rising by nearly 1.00% today.
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