Draghi's initial remarks seem fairly optimistic for a central bank in which that the economy it is overseeing is contracting. He noted improvement in sentiment and some greater financial integration.
The point on financial integration is important. This is partly the transmission mechanism that prompted the Outright Market Transaction scheme in the first place. It is also partly the increased foreign participation in the Spanish and Italian bond market. More broadly this is the improvement in financial conditions, declining yields in the periphery, rising equity markets and the gradual return of depositors. It is also the improved current account balances, which is also reflected in Target2 imbalances.
The decision today, unlike in December was unanimous. That is, in December many wanted to cut rates, though none was delivered. Today no one favored reducing rates.
We would take away from Draghi's comments that the bar to another rate cut is higher than seemed to be the case last month. This is reflected in both the implied forward rates and in the euro moving above $1.3150. We look for a retest on the $1.33 high seen in mid-December and again at the start of the year. If improved financial conditions do not lead to improvement in the real economy, a rate cut expectations may return, but this now seems like a Q2 potential not Q1.