Week In FX Europe - Draghi Hits Back At IMF Low Inflation Expected

by: Dean Popplewell

By Alfonso Esparza


  • ECB held rates this week. Low inflation is a concern but no immediate steps needed.
  • IMF criticized ECB non-action urges easing policy.
  • ECB President Draghi responded with low inflation awareness message, but still within expectations. If than changes they are ready to act.
  • Ex-ECB member has suggested they will act, but they need about 2 months to get all members states to approve.
  • German data only EUR positive this week.

United Kingdom

  • British releases came in soft this week.
  • Housing and PMI declined overall but their trends still show expansion.
  • Pound staying above 1.65 versus USD after starting the week at 1.6637.
  • BoE Governor says rates could rise before 2015 elections.

The European Central Bank (ECB) was under a lot of pressure this week. The International Monetary Fund issued a statement where it urged the ECB to adopt some easing measures to avoid “lowflation” and further “Japanization” of the Eurozone. ECB President Mario Draghi responded the next day with a view the central bank expects low inflation for longer, but is ready to act if it falls to deflationary levels.

The EUR was on the back foot for most of the week, with only the German data boosting it versus major pairs. EUR/USD will finish the week barely above 1.37 after March’s NFP numbers pointed to a stronger US economy. The US added 192,000 jobs and healthy revisions for the two earlier months. This validated the hypothesis that the bad weather that hit North America was no longer a factor.

German factory orders rose up more than expected in February. There is multiple data pointing to a strong first quarter for the German economy. Manufacturing grew 0.6 on a month to month basis. The market was not that pleasantly surprised at the downward revision for January that went from 1.2% down to 0.1%. Most of the growth was on the domestic side, as foreign orders continue to be almost flat due to the strong EUR.

The UK released weaker than expected PMIs. The readings still point to an expansion, but came in lower than forecast. The service PMI fell to 57.8 after a 58.2 print in February. The manufacturing and constructions PMIs were also down but close to expectations.

Next week the Bank of England will communicate its rate decision. Rates will remain on hold as per the forecasts. BoE governor Mark Carney has said that rates are not limited by the election cycle and could go higher before the May 2015 UK elections.