Thursday, May 8, 2014

Señor Draghi does the business – eventually | Is there a political dimension to Euro zone monetary policy?

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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