European Central Bank president Mario Draghi is speaking at his monthly press conference about the central bank’s decision earlier today in which it announced no new change in policy, and the euro is sliding against the dollar.
The exchange rate peaked above $US1.3630 just after 8:30 AM — when Draghi’s presser began — and is now trading near $US1.3560.
Draghi said the ECB took steps to strengthen the language in its forward guidance on the future course of monetary policy by outlining two things that would make it take further action to ease monetary conditions: tightening via a rise in money-market rates and deterioration in the medium-term outlook for inflation.
The risk of deflation in Europe is a growing issue. Earlier this week, the Eurozone core inflation rate fell to its lowest level in its history. Fears that Europe is going to go down the Japan route of persistent deflation or disinflation has now supplanted breakup as the number once concern for the Eurozone.
As such, Draghi is putting more emphasis on forward guidance as a tool to commit to low rates, and that’s caused the Euro to dive today.
“For the first time in nearly 2.5 years, 2-year Eonia is flirting with the ECB refi rate,” said Société Générale interest rate strategists Vincent Chaigneau and Ciaran O’Hagan before the ECB decision today. “Will that bother the ECB? Not quite, as they probably see this as a hopeful sign that investors are looking forward to brighter economic conditions. At some point, the ECB may address the question of falling excess liquidity, but we see no urgency.”