The euro's gains overnight belie Draghi's dovish tilt
Draghi laid out the groundwork for the ECB to shift to a more dovish stance
The euro was the best performing major currency in overnight trading but it doesn't say much about how those gains came about and how those gains had been tempered with as market participants digested Draghi's remarks.
As mentioned yesterday, there are two things that stood out from the ECB meeting statement; that being a shift in forward guidance (no rate changes anticipated until 1H 2020) and more generous TLTRO terms set out by the central bank.
Over to Draghi's press conference, things started off with less dovish remarks as he highlighted that inflationary pressures will rise towards the end of the year and that it will increase in the medium-term i.e. not much of a change in the inflation outlook.
However, he then later dropped a couple of bombshells that I reckon markets will pick up on more in the coming weeks when economic data in the euro area continue to disappoint:
Prior to those comments, I argued that perhaps the euro could gain in the short-term on position covering and the rates market doing some repricing (money markets had previously priced in a 10 bps rate cut by March 2020).
But with Draghi trying to put the ECB's decision into perspective, I reckon it'll give markets more incentive to expect further monetary policy easing should economic data continue to deteriorate over the next few months:
If economic data continue to disappoint, this event will be increasingly seen as a dovish step in my view. The first change towards any possible easing stance is to signal less confidence in the forward guidance. The ECB has done so here by pushing it back to 1H 2020. Thus, if inflation continues to fall flat, expect a change to a more neutral tone by the ECB in the coming months. And as soon as markets get a grip of that, the euro would be in a position to fall again given political risks with Italy and economic worries surrounding the region.