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Euro Remains Vulnerable as ECB Says Guidance Was Misinterpreted

Euro Remains Vulnerable as ECB Says Guidance Was Misinterpreted

Nick Cawley, Strategist

Talking Points

- EURUSD dropped sharply in European hours after the ECB said that it is not changing its monetary stance.

- Euro-Zone inflation likely to edge lower this Friday.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

Recent comments from the ECB were misinterpreted, according to a Reuters report citing ECB officials, after President Mario Draghi dropped some of the more dovish central bank language and did not replace its bank lending facility at its latest policy meeting on March 9.

And adding to the slightly hawkish feeling, ECB policymaker Ewald Nowotny said a week later that the central bank would decide in the future if it would raise interest rates before ending its quantitative easing program, a comment that took market participants by surprise. Bond yields rose, while EURUSD gradually rose to a four-and-a-half month high.

Chart: EURUSD Four-HourTimeframe (March 9 – March 29, 2017)

Euro Remains Vulnerable as ECB Says Guidance Was Misinterpreted

Chart by IG

The report now says that recent comments were overinterpreted and that policy makers were just trying to signal reduced tail risk and not a path to tighter monetary policy. The single currency fell sharply, slipping back to levels seen last week and nearing important technical areas.

And upcoming inflation data on Friday may justify the central bank’s reticence to tweak monetary policy, with consumer prices expected to remain stagnant or even tick a fraction lower in March.

Friday March 31, 2017. Expected Last

Euro Remains Vulnerable as ECB Says Guidance Was Misinterpreted

Source DailyFX Weekly Calendar.

Lower inflation, especially the closely-watched core index, will give the ECB more flexibility to leave rates lower-for-longer and defer any tapering talk until growth across the Euro-Zone has become embedded. The core inflation rate is currently running at 0.9%, not close enough to the ECB’s stated aim of ‘near to 2%’ to cause President Draghi to change anything, even rhetoric, at the next ECB meeting on April 27.

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

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