ECB: Draghi brings a pea shooter to a currency war - TDS

The ECB’s press release was unchanged, with all forward guidance left in place and the opening statement brought back the September language on the volatility in the EUR, but with Draghi not pushing back forcefully enough during the press conference, markets took that as a green light to push the EUR higher still, explains the analysis team at TDS.

Key Quotes

“However, the less the ECB pushes back now and lets EUR and rates race ahead, the worse the prospects for medium-term inflation. We think that softer inflation outcomes will eventually limit the move higher in EUR and rates, and that the lack of progress toward the inflation target will have the ECB keep its forward guidance in place for longer than expected.”

“FX Strategy: The January ECB meeting keeps our focus on upside risks to EUR – particularly against the USD. The lack of any real pushback against recent EUR strength points to further near-term gains ahead as the currency’s fundamentals remain robust. The immediate technical picture is more mixed, as major thresholds loom, but a sustained break higher could draw in notable buying interest amid ongoing shifts in global capital flows.”

“Rate strategy: At today’s meeting the ECB has set the stage for steeper front-end curves. We continue to favour 4y1y-1y Eonia steepeners and short 5y Bund ASWs trade in our model portfolio.”