The euro has moved above $1.38 as the ECB disappoints those who were looking for some new initiatives. While only a slow recovery is expected, there is a lack of urgency. Ideas of a negative deposit rate or outright QE seems well wide of the mark, not just this month, but going forward.
The ECB staff tweaked up 2014 GDP to 1.2% from 1.1% and left next year's unchanged at 1.5%. It introduced a forecast for 2016 of 1.8%. Draghi repeats that inflation expectations are anchored and this is reflected in the new staff forecasts for the harmonized inflation.
This year's CPI forecast was tweaked lower to 1.0% from 1.1% and left next year's forecast unchanged at 1.3%. Draghi helped interpret the meaning of the 2016 forecast for 1.5%. He noted that in Q4 2016, the staff projected CPI at 1.7%, which seems to meet the ECB's interpretation of price stability; close to but lower than 2%.
Draghi had a chance to talk the euro down, but again he refrained. Draghi reiterated that the exchange rate is not a policy target. However, in his restrained way, by noting that the exchange rate is important for growth and inflation, he hints at the direction he prefers to see the euro move.
In response to a question, he seemed to play down the likelihood of stopping the sterilization of SMP. He specifically said the benefits were small and the liquidity inject would not last long, and there was no justification for doing do. This seems to rule it out not just now, but going forward as well.
The euro reached a high of $1.3825 last week and has approached that area now in response to the ECB's lack of action and Draghi's apparent lack of urgency. Although some observers had favored an April move, Draghi's tone makes this seem unlikely as well. In the context of the likelihood of a weak US jobs report, and the diminished chances of fresh moves from the ECB, additional euro gains should be expected. Above $1.3825, the market will look toward the high made in late 2013 near $1.39 and then $1.40 looms.
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