ECB and Draghi currency jawboning
The Draghi Press conference was more upbeat on economic growth and noted some moderate uptick in underlying inflation recently, which helps account for the EUR strength in response to the statement.
However, the statement did insert concern over the strength of the exchange rate, suggesting that Draghi and the Governing Council are trying to jawbone against further appreciation.
Draghi said when pushed that he does not comment on the level of the exchange rate and it is not a target. However, the press release statement and his comments are designed to calm the gains in EUR.
Very high up in the statement, in the second paragraph, it said, “the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.”
And it also noted that the higher exchange has resulted in slightly lower inflation forecasts. It said, “Compared with the June 2017 Eurosystem staff macroeconomic projections, the outlook for headline HICP inflation has been revised down slightly, mainly reflecting the recent appreciation of the euro exchange rate.” These forecasts are: HICP inflation at 1.5% in 2017, 1.2% in 2018 and 1.5% in 2019.
Deputy Victor Constancio confirmed that the exchange rate used in these forecasts is around its mid-August level (1.1750ish). So already the exchange rate is higher.
No announcements were made on a taper. The statement said, “This autumn we will decide on the calibration of our policy instruments beyond the end of the year”. Draghi confirmed in Q&A that key points would be announced at the next meeting in October.
The EUR rose sharply into the meeting and further after, seeming to pay little heed from to the press statement that the currency matters. The USD is under pressure broadly and the statement was more confident on growth, and the downward revision in the inflation outlook was slight.
The ECB might have hoped its jawboning would have had more effect. We should be more cautious buying EUR, these comments may get more airing and emphasis going forward.