European Banks Get ‘Draghi Boost’ After ECB President’s Policy Hints

Writing last week, the team said: “We expect Mario Draghi to acknowledge that the downside risks to the economic outlook have ebbed in recent weeks, but partly thanks to the upcoming elections, he will probably stress that the overall balance of risks is still tilted to the downside”.

The sharp increase in inflation in Germany (which further erodes the real return on savings) is emboldening the German-led “hawks” in the ECB’s governing council, led by Jens Weidmann, the head of Germany’s central bank, to push for a meaningful scaling back, or “tapering”, of QE.

TreasuryOne currency dealer Phillip Pearce said prior to the announcement that even though inflation was at 2% in the region for the first time since 2013, the bank’s dovish stance continued.

Policymakers also left the main refinancing rate at zero and the deposit rate at minus 0.4 per cent, as predicted by all economists in a Bloomberg survey.

The ECB meeting has probably been the most important event this week so far.

GBP – sterling is trying to turn the corner against the euro after the United Kingdom budget yesterday left mixed impressions, somewhat pro-SME, but certainly anti-self-employed.

The eurozone economy grew 1.7 percent a year ago as the currency union recovers from a crisis over high debt that threatened to break it apart in 2011-2012. Eurozone inflation reached 2 per cent in February and the European Central Bank inflation forecast of 1.3 per cent for 2017 looks rather outdated.

Asian shares painted a mixed picture during early trading on Thursday following the bearish cues overnight from Wall Street and heavily depressed commodity prices.

Whether the mixed message was intentional or not, it neatly set the scene for a gradual progression that ought to take place during this year, as quantitative easing is slimmed down to 60 billion euros ($63 billion) a month from April and the now scheduled end of bond buying, in December, approaches. More importantly, in our opinion, we are aware that whilst short-term revisions to inflation mainly reflected changes to what’s happening in the energy sector, core inflation was also revised up slightly.

While the Pound has suffered due to a generally disappointing budget statement, the US Dollar has conversely risen, posting a 0.2% advance against Sterling. Whilst the European Central Bank meeting didn’t yield a major shift in policy it still appears that Euro-zone economy is finally on the up and that in 2018 rates could start creeping higher. Due to all the macroeconomic events taking place in the United Kingdom, it is likely the Bank of England will retain interest rates low for a while, which could potentially further hurt the British pound.

The press conference highlighted several key details about the ECB’s meeting of the Governing Council. Wage growth also missed forecasts, rising 0.2 percent versus an expected 0.3 percent increase. They rose to 2.624 percent earlier on Friday, a level last seen in mid-December, Reuters data showed. Dutch 10-year government bond yields hit a near three-week high of 0.506 percent on Thursday, up 2 bps on the day.