Draghi crushes expectations of immediate help

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Yesterday’s ECB decision and press conference was largely an exercise in expectation management; a lesson that could have been given last week but the binary nature of today’s markets put paid to that.

Prices in the past week have been bid higher on the basis of Mario Draghi’s assertion that the ECB would do “whatever it takes” to secure the future of the euro. Yesterday it seemed that Draghi was attempting to row these comments back slightly as no new action was forthcoming. The statement that they may undertake outright open market operations, i.e. buying of peripheral debt to reduce yield pressures, which were described as unacceptable in the press conference, was greeted initially by positivity. It was then that the market realised that that was all it was going to get,

It was almost what the markets wanted, but the emphasis has now shifted from those three words “whatever it takes” to one word; “may”. The fact that they will have to discuss ‘modalities’ and ‘seniority’ suggests that they know what they want to do, but they’re really not sure how to do it yet.

That wasn’t good enough in the market’s eyes and euro, alongside global equities and peripheral debt hit the skids. The Fed is also ‘sitting on its hands’ following Wednesday’s decision and it highlights the fact that September will be the most important month in global monetary policy history.

I think there are positives to take from the conference however. 12 months ago we could only have dreamed of getting the ECB this close to open market operations but there’s still a lot of road to cover and that road has a huge Bundesbank shaped roadblock right in the middle of it. The battle between Draghi and Bundesbank Chair Jens Weidmann is heating up day by day.

Draghi has also batted the ball back to politicians and yesterday’s press conference was confirmation that the ECB is refusing to do the politician’s dirty work. This is a good thing; the long-term competitiveness issues within the Eurozone cannot be fixed by simply throwing money at the situation and requires deep fiscal changes, something that can only be decided within parliaments.

Yesterday’s BOE meeting was a non-event and we expect it to be a facsimile until November which is when the latest injection of QE will end. Particiapants in yesterday’s webinar will have seen a graph denoting the relationship between QE and UK growth; it isn’t good and although more may be on its way, growth is not guaranteed as a result.

The moves in world markets do not quieten today as it is Non-Farms Friday. This is, maybe erroneously, the bellwether that the Fed has picked as a signal for further monetary policy easing and a figure below 50k today will see expectations once again ratcheted higher.

We also have services PMIs from around the world much like Wednesday’s manufacturing spurt. China’s has disappointed against expectations so far but has remained in expansion territory. If similar is seen elsewhere that may stem some of the losses we’ve seen in the past 24hrs but event risk from a political follow-up to yesterday’s European issues cannot be ruled out.

Indicative Rates Sell Buy
GBPEUR 1.2706 1.2733
GBPUSD 1.5510 1.5608
EURUSD 1.2192 1.2215
GBPJPY 121.30 121.57
GBPAUD 1.4762 1.4788
GBPNZD 1.9041 1.9069
GBPCAD 1.5578 1.5607
NZDUSD 0.8135 0.8155
GBPZAR 12.91 12.96
USDZAR 8.3181 8.3588
GBPPLN 5.2082 5.2345
EURJPY 95.36 95.62

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Draghi crushes expectations of immediate help

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