The Power of Words - Draghi "collapses" the euro. Fundamental analysis for 12.05.2014
12.05.2014
Draghi managed to "derail" the Eurodollar, saying on Thursday that next month the ECB may start taking stimulus measures if the inflation will once again be negative. Meanwhile, Draghi did not specify the exact measure the regulator might take. Apparently, everything will depend on the May statistics, which will become available just before the June meeting of the Board of Governors.
It is not clear whether with these words Mario Draghi’s intention was to warn the market about the long-awaited beginning of the European QE or at least the reduction in the interest rates, or whether it is more “empty air." It should be noted that his repeated promises to do at least something put the ECB chief in a rather difficult position. If in June no action on his part is taken, the euro may rise even further.
Note that the ECB is virtually the only Western central bank taking no stimulating measures. For example, the actions of the neighbouring Bank of England allowed the British economy to return to growth at comfortable enough inflation and unemployment rates in the five-year minimum. Of course, the management of the euro area is a much more complicated process; however that is no reason to sit idly by.
Rather, the most that the ECB will do at their next meeting - is lower the key rate to 0.10 - 0.15% with a statement that the regulator will keep the rates low until inflation enters its growth cycle. If in the end of May the inflation rises to 0.8% or even 0.9%, then Mario Draghi can with good reason maintain the status quo on rates, including depository rates.
If inflation in the euro zone is still somewhat monitored, the unemployment which has slightly declined to 11.8%, is fairly ignored. The main difficulty lies in the fragmentation of the euro zone – from the minimum rate in Austria at 4.9%, to a maximum in Spain at around 25.3%. The longer it goes on, the higher the risk of transition from cyclical to structured unemployment, which is much more difficult to deal with.
On Monday, no important developments are expected, and therefore the euro/dollar can continue to play on the recent statements by Mario Draghi. The moment of truth will be Thursday, when the preliminary data on GDP dynamics in the euro area for the first quarter comes out, as well as the updated statistics on inflation. If data will be strong, the euro could at lease go into correction, as the better the statistics, the lower the likelihood of action by the ECB.
RoboForex Analytical Department
It is not clear whether with these words Mario Draghi’s intention was to warn the market about the long-awaited beginning of the European QE or at least the reduction in the interest rates, or whether it is more “empty air." It should be noted that his repeated promises to do at least something put the ECB chief in a rather difficult position. If in June no action on his part is taken, the euro may rise even further.
Note that the ECB is virtually the only Western central bank taking no stimulating measures. For example, the actions of the neighbouring Bank of England allowed the British economy to return to growth at comfortable enough inflation and unemployment rates in the five-year minimum. Of course, the management of the euro area is a much more complicated process; however that is no reason to sit idly by.
Rather, the most that the ECB will do at their next meeting - is lower the key rate to 0.10 - 0.15% with a statement that the regulator will keep the rates low until inflation enters its growth cycle. If in the end of May the inflation rises to 0.8% or even 0.9%, then Mario Draghi can with good reason maintain the status quo on rates, including depository rates.
If inflation in the euro zone is still somewhat monitored, the unemployment which has slightly declined to 11.8%, is fairly ignored. The main difficulty lies in the fragmentation of the euro zone – from the minimum rate in Austria at 4.9%, to a maximum in Spain at around 25.3%. The longer it goes on, the higher the risk of transition from cyclical to structured unemployment, which is much more difficult to deal with.
On Monday, no important developments are expected, and therefore the euro/dollar can continue to play on the recent statements by Mario Draghi. The moment of truth will be Thursday, when the preliminary data on GDP dynamics in the euro area for the first quarter comes out, as well as the updated statistics on inflation. If data will be strong, the euro could at lease go into correction, as the better the statistics, the lower the likelihood of action by the ECB.
RoboForex Analytical Department
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