In
yesterday’s commentary we pointed to the possibility that the European
Central Bank (ECB) might have an effect on the fortunes of the EURGBP pair when
the bank made its monetary policy announcement, which was due later in
the day yesterday, or when Mario Draghi presented his press conference
afterwards.
The announcement itself came
in as per consensus – there was no change to interest rates. The market seemed
to have priced in some small downward adjustment and therefore regarded no
change as bullish for the Euro, moving the pair upward in price. That is, until
Mr. Draghi started to speak. His comments amounted to a litany of promises
about what the ECB would do at the June meeting in order to target both the
current low inflation regime and what is perceived to be an elevated Euro.
These comments caused the
pair in question to rapidly reverse course, as can be seen in the chart above.
From a technical point of view, as is apparent in yesterday’s chart, this
downward movement is in accordance with the dominant trend.
Is there a political dimension to Euro zone monetary policy?
Our readers in other parts of
the globe may not be aware of the fact that elections for the European
parliament will take place between now and the next ECB policy statement in
June. One of the comments from the bank president yesterday might have
considerable significance in light of this. He said:
'Over the last few days we've received plenty of
advice from political figures and from institutions on almost everything,'
The fact of the matter that
the interests of the economy as a whole and the interests of individual voters
are seldom perfectly aligned. Economist worry about deflation as it adversely
effects consumer spending, but voters like to see prices in the shops reduce,
rather than grow or even remain the same. Economists are aware that a strong
Euro can have a deleterious effect on exports of goods and services, while
individual citizens like it when they can travel to non-Eurozone countries and
get good value for their money. They also tend to take pride in a strong home
currency.
Foreign Exchange market
participants want to see action on the part of the ECB, rather than rhetoric.
There were dark muttering reported yesterday from some institutional traders to
the effect that the ECB has promised to take easing measures before, but failed
to deliver. It looks like we will have to wait until the elections for the
European Parliament are out of the way before we can see anything concrete this
time round.
We are grateful to our Brussels correspondent
for pointing out this possible political dimension.
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