Draghi denies deflation, calm about everything – EUR/USD leaps

After the ECB left all rates unchanged again, president Mario Draghi met the press sent a very calm message about low inflation and again denied deflation. He put the blame for low headline inflation mostly on energy and food prices, and the weakness in core inflation on “program countries”. Also the drop in money supply is only temporary, due to the fact that banks are preparing themselves for the stress tests. While saying that they are ready to act, Draghi sent a calm message about everything. Data in March can change things, but the message is that things are not expected to change.

Live blog of the event.

Analysis: ECB expects the situation to sort itself out, but things could still worsen

Highlights

• Inflation expectations firmly anchored.
• Prolonged period of long inflation as expected.
• Current low inflation mostly due to energy prices.
• M3 weakness due to AQR in end 2013. 2014 will be different.
• No deflation.
• EUR/USD climbs 120 pips to 1.3615 during the presser.

Live blog

• 13:10 GMT. All times are GMT. Press conference begins at 13:30.
• 13:10 You can watch the event here.
• 13:10 At the same time, 13:30, the US releases jobless claims and trade balance numbers. Claims are expected to stand at 337K. The trade balance deficit is forecast to remain around 35 billion.
• 13:11 EUR/USD rose after the rate announcement, but then fell back. 1.35 is a line of struggle.
• 13:14 Note that when Draghi says the words “downside risks”, the euro tends to make a temporary dive, unrelated to the message of the presser.
• 13:17 One of the options that were mentioned was that Draghi will announce the end of the SMP sterilization. This means stopping to drain money out of the markets due to the ECB’s bond buys. The SMP, a discontinued program, is worth more than 200 billion euros.
• 13:20 So far, the scenario with the highest probability is still valid: no policy change but hint of a move in March.
• 13:23 EUR/USD is certainly on the back foot, trading now below 1.35.
• 13:25 Given this weakness, if Draghi remains calm, the euro has a lot of room to rise, maybe above 1.36.
• 13:26 In the not so distant past, Draghi zig-zagged between optimism and pessimism. If this happens again, we will get a rally this time. But with low inflation, it doesn’t seem that probable.
• 13:28 EUR/USD seems to have stabilized at 1.3495.
• 13:30 US jobless claims at 331K, within expectations.
• 13:30 Press conference begins, EUR/USD at 1.3495.
• 13:31 Decided to leave rates unchanged. Moderate recovery is proceeding according to expectations. Underlying prices pressures remain weak.
• 13:31 Inflation expectations are firmly anchored.
• 13:32 As aforementioned, a long period of low inflation. Recent evidence fully confirms the recent policy.
• 13:32 Firmly reiterate the forward guidance: low rates for an extended period of time: subdued outlook for inflation into the medium term.
• 13:32 EUR/USD climbs above 1.35.
• 13:33 We are monitoring developments closely and ready to use all available instruments.
• 13:33 EUR/USD leaps to 1.3540 on Draghi’s lack of new warnings
• 13:35 Growth is advancing as expected.
• 13:36 EM issues may have negative implications. Slow or insufficient implementation of reforms. Annual HICP 0.7%.
• 13:37 Inflation lower than expectations, but mostly due to energy.
• 13:38 Inflation to remain at current levels in the medium term. Inflation expectations in the medium to long term firmly anchored. Both upside and downside risks remain limited and broadly balanced.
• 13:39 M3 dropped to 1% in December. Could be related to adjustments by banks due to the AQR.
• 13:40 With Draghi putting the blame for inflation on energy and the M3 drop on banks, the chances of action remain low. EUR/USD rallies
• 13:40 Weak loan dynamics
• 13:41 Preaches governments as usual.
• 13:42 Questions begin
• 13:43 Contingencies to EM crisis discussed. Draghi is calm also here.
• 13:44 The volatility is not transmitted to the long term – outcome of forward guidance.
• 13:45 Question about SMP sterilization and March moves.
• 13:46 Draghi answers: we are studying. The measures depend on the contingencies: an unwanted tightening of the monetary policy to the long term and 2) worsening of the medium term outlook for inflation.
• 13:47 What does a worsening mean? We have already taken action in November, but it takes to to propagate.
• 13:48 Draghi says No Deflation. EUR/USD breaks 1.3580.
• 13:49 Draghi compares to Japan and sees better conditions.
• 13:50 The longer we have low inflation, is a risk by itself and warrants close attention. However, the causes are food and energy prices, and weak demand.
• 13:51 The demand side is getting stronger, not weaker. Recovery fragile and uneven.
• 13:52 Savings rates have been stable and consumer confidence is rising.
• 13:52 VAT increases have not been passed through in Italy and France. Retail sales were weak.
• 13:53 The pricing power by the firms is still weak.
• 13:53 Most of the decline in inflation comes from the program countries.
• 13:54 The picture is complex and we prefer to wait.
• 13:55 EUR/USD is at 1.3584. Question about action in March.
• 13:55 The decision today is different than in November. In March, we will have a forecast for 2016.
• 13:56 We are waiting for new forecasts before making new decisions.
• 13:57 We may have different figures in 2014, as banks worked hard to end 2013 nicely.
• 13:58 Another figure awaiting: Q4 GDP. Having said that, we are willing and ready to act.
• 14:00 We had a bank lending survey in which we examine risk perception.
• 14:01 EUR/USD breaks 1.36
• 14:02 Not only is there greater confidence (since 2012), but that this confidence turns into better lending conditions.
• 14:03 It’s pretty clear that banks made some deleveraging towards the AQR. The short term consequences was a balance sheet cleanup. This has a negative effect on credit.
• 14:04 Things are changing in 2014. In not a long time, we will have a resilient banking system ready to lend.
• 14:05 Draghi continues the optimistic message and EUR/USD remains high.
• 14:06 We need more information. No issue of legality.
• 14:07 Question about promissory notes for Ireland. We are collecting all the necessary information.
• 14:08 Draghi rejects criticism about poor communications.
• 14:10 EUR/USD continues rising, crossing 1.3610.
• 14:12 It takes time for interest rates to take effect, but that time has fallen – our policy is more effective.
• 14:13 Any decision we take will depend on data.
• 14:14 Each central bank has its own institutional setup. The priority is always to comply with the mandate. In our case, price stability. So, coordination might imply that one central bank would take a decision that would not be good.
• 13:16 Exchange of information and discussions are extremely useful.
• 13:17 EUR/USD challenges 1.3615.
• 13:18 The situation is completely different from Japan. We don’t have deflation.
• 13:19 The inflation in the US is also low, especially when looking the state of their recovery, which is better than ours.
• 13:20 About selfishness: one has to show that actions were done not for the sake of the mandate.
• 13:21 Question about the symmetry of inflation / deflation.
• 13:22 Low inflation for a long time are a risk by themselves for a recovery, for the weight of debt in real terms. Let me say one more time: we are alert, and willing to act.
• 13:23 Draghi is proud of the ECB’s success regarding inflation. We have a symmetric attitude. What matters is the medium term outlook.
• 13:25 EUR/USD is hesitating at 1.3615.
• 13:26 Unemployment is much higher in the program countries.
• 13:27 The issue of coordinating monetary is with us since WWII.
• 13:28 Coordination has been huge since Breton Woods.
• 13:29 Q: Did you discuss a rate cut or not sterilizing?
• 13:30 We didn’t discuss buying equity. We are working hard to reach the target inflation of 2%.
• 13:31 Last questions: about QE, AQR.
• 13:32 OMT is a well specified program and could be used in re denomination risks (euro breakup).
• 13:34 Press conference ends
• 13:39 Highlights updated.

Background

Expectations for action by the ECB rose after inflation figures in Germany fell short and later when euro-zone CPI dropped to the cycle low of 0.7%. However, core inflation is still at 0.8%, above the bottom of 0.7%.

In the ECB preview, we talked about a high probability that the ECB leaves policy unchanged but hints about a negative deposit rate in March. A negative deposit rate could send the euro plunging, thus pushing up inflation and helping exports.

Support for the euro appears at 1.3480, and resistance at 1.3550. For more levels, events and analysis, see the EURUSD forecast.

The ECB press conference is not the last big event of the week. Tomorrow we have the king of forex trading: Non-Farm Payrolls.

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