The euro is on a tear on Thursday afternoon despite dovish comments from ECB President Mario Draghi to journalists following the central bank’s decision to leave monetary policy on hold at the July meeting of its governing council.
For the time being the ECB’s bond buying programme will remain capped at €60 billion per month and its interest rates — a deposit rate of -0.4% for banks, and a base interest rate of 0.0% — will be maintained.
There was virtually no chance that the ECB would make any formal changes to its policies on Thursday.
However, market participants have been keenly watching for any change in the wording of the bank’s policy statement for hints about when further tapering may occur.
That hint did not come on Thursday with the statement unchanged from the bank’s June meeting, and Draghi said that policymakers were “unanimous” in their decision not to change its wording.
The euro has popped despite Draghi striking a dovish tone during his comments.
“Inflation is not where we want it to be and where it should be,” he said.
“We are still confident that it will gradually get there but it is not there yet. That is why we reiterated that our package of monetary accommodation is still needed.
By 3.30 p.m. BST the euro is close to 1% higher to trade at 1.1623 against the dollar, as the chart below shows:
Market expectations are that the ECB will announce a cut in the amount of bonds it is willing to buy from €60 billion to €40 billion in September, with a start date of January for that tapering. That’s in reaction to the gradual strengthening of the eurozone economy and the small rise in inflationary pressure in recent months.
While Draghi was dovish, it effectively seems as though the markets do not really believe what he said on the day, and continue to see tapering in the near future.
“We think that — within the broader framework of multi-year policy normalisation — the ECB is now focused on carefully preparing the markets for a tapering decision on 7 September,” UBS economists led by Reinhard Cluse wrote in a note to clients this week.
“We expect the ECB to announce on 7 September that it will start tapering QE as of January 2018, across all four asset classes (sovereigns, corporates, covered bonds, and ABS) and with a first reduction in the monthly asset purchases from €60bn to €40bn,” they continue.
However, Draghi said during his press conference that the ECB has not yet discussed different scenarios for tapering QE.