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Hopes are high for today’s ECB meeting.That’s because last week, Mario Draghi said to critical things that caused people to think the ECB was going to do something substantive to reduce interest rates in countries like Spain and Italy.
First, he said that he would do anything to rescue the Euro. But more importantly he said that ultra-high yields in some countries were interfering with the transmission of monetary policy, and thus came under his domain.
The takeaway from that was that he would use the ECB balance sheet to depress yields.
Remember, early last week, Spanish and Italian borrowing costs were going bezerk.
Central bankers are usually incredibly careful with every utterance, but it is conceivable that Draghi was talking more generally (or hurriedly) without a real plan that has any support inside the ECB.
Citi’s FX guru Steven Englander hinted at this in his quick note after yesterday’s Fed decision, when he wrote:
Investors may also be pulling back a bit from ECB expectations on the view that coordinated easing is out of the picture (keeping in mind that such coordinated easing is far from common). The misread of the fed may also worry investors that they have misread Draghi. That said, we still see the EUR as having considerable upside if there is a concrete indication of immediate or forthcoming SMP buying, and considerable downside if the ECB Statement is as disappointing as the Fed Statement, because FX investors are more invested in the ECB policy move than in the Fed’s right now.
Anyway, we’ll know in a few hours, but there’s certainly a chance that people misread Draghi, or Draghi went further than he meant to, and that the meeting will be a major disappointment.