Draghi concerns over the EUR and trade - AmpGFX

In view of Greg Gibbs, Analyst at Amplifying Global FX Capital, EUR may be at risk of a correction lower which includes waning Eurozone inflation expectations, a cooling in recent Eurozone economic data,  and a weaker EUR performance since the last ECB meeting, despite the removal of a key easing bias in its statement.

Key Quotes

“In a speech on Wednesday, ECB President Draghi made comments that gel with these developing risks for the EUR.”

“Firstly, he emphasized that the ECB needs progress on “the path of inflation towards our aim” not just strong growth, “to bring net asset purchases to an end.”

“He further emphasized that the pace of rate increases, once asset purchases have ended, will much depend.”

“He said, “While we are now more confident than in the past that inflation is on the right track, risks and uncertainties remain. For this reason, even once the outlook becomes less dependent on net asset purchases, monetary policy still needs to be patient, persistent and prudent to guarantee the return of inflation to our aim.”

“While expressing confidence on the state of the Eurozone recovery, and eventual return to its inflation target, Draghi noted a number of uncertainties in this outlook.”

“He said, “To build confidence that inflation dynamics are on track, we will need to see the actual data improving over time, which means stronger evidence of both strengthening wage growth and wage growth translating into ULC growth.”

“He said, “Moreover, there are still two risks to the outlook that could – if they intensify – conspire to reduce our confidence in the inflation path.”

“The first is the risk of a trade war escalating out of the recently announced tariffs, extending to other goods.  We know that Trump is intensifying his protectionist rhetoric, and specifically against the Eurozone if it attempts to target other US goods.  As such, this may be seen by the FX market as a reason to be less certain of its EUR outlook.”

“The second is the EUR exchange rate itself.  Draghi said, “The euro has appreciated since the beginning of last year, and according to our analysis, this has recently been driven more by exogenous factors – that is, purchases of euros that cannot be explained solely by the economic expansion. This might weigh on inflation down the line as it does not fully arise from stronger euro area fundamentals.”