Euro Dumps To Session Lows After ECB Minutes Reveal Concerns About “Euro Overshooting”

While hardly a surprise after yesterday’s Reuters trial balloon, which killed any speculation that Draghi would use the Jackson Hole podium to announce ECB balance sheet tapering, sending the EUR sliding, moments ago the EUR dumped to fresh session lows after the highly anticipated ECB minutes were released, noting that “concerns were expressed about the risk of the exchange rate overshooting in the future,” confirming what we speculated last week, namely that for all the pseudo-hawkish rhetoric from Draghi since Sintra (and before), the ECB simply will not tolerate a Euro which approaches 1.20 and threatens to dent European corporate earnings.

The immediate knee-jerk result sent the already sliding EUR/USD to session lows:

There were also a few clues on future policy:

• “On the other hand, there was a risk that financial conditions could tighten to a degree that was not warranted by the improvement in economic conditions and the outlook for inflation. In this context, the point was made that, looking ahead, the Governing Council needed to gain more policy space and flexibility to adjust policy and the degree of monetary policy accommodation, if and when needed, in either direction.”
• “Measures of underlying inflation, while showing some tentative signs of a pick-up, still needed to show conclusive evidence of a sustained upward trend. Therefore, a very substantial degree of monetary accommodation was still needed…”

Among the other highlights from the minutes, which were initially read as dovish across most Wall Street desks, were the following observations:

• “The appreciation of the euro to date could be seen in part as reflecting changes in relative fundamentals in the euro area vis-a-vis the rest of the world” but “concerns were expressed about the risk of the exchange rate overshooting in the future”
• “Looking ahead, the Governing Council needed to gain more policy space and flexibility to to adjust policy and the degree of monetary policy accommodation, if and when needed, in either direction.”
• “The overall degree of accommodation was determined by the combination of all the monetary-policy measures”
• “The asset purchase program would continue to be a key instrument if the Governing Council assessed the sustained adjustment of inflation at risk”