Maintain Economy ― Draghi’s Goal is to convince the market of the aggressiveness of incentives
Tomorrow will be a regular meeting of the European Central Bank, which the regulator should announce the expansion of the program of monetary stimulus. This event can be called the main event of the week for financial markets. The outcome of this meeting will determine the future prospects of the European currency, and finally it turns out the conditions are ripe for a more active lower Euro-dollar exchange rate towards parity or the Euro will continue its resistance to the American competitor. About it says in the program «Replica» economic analyst Grigory Beglaryan
Us dollar weighs on the single currency. The reason is the upcoming ECB meeting. Mario Draghi, as in December last year, are pinning their hopes too high.
It is natural that persistent monetary stimulus by the ECB aimed at reviving the Eurozone economy, but pursuing a specific goal to limit the risks of deflation through a weakening of the Euro. And although the leadership of the ECB strongly denies artificially lowering the value of the currency, the actions of the regulator indicate otherwise.
In this case, we must bear in mind that against the Euro plays too many factors such as the slowdown of the economy, the migration crisis, the risks of a British exit from the EU, the negotiations on Greek debt, the yields of sovereign bonds and growing concern about the stability of the European banking system. These circumstances seemingly make it easier for the ECB local tasks, in particular to weaken the exchange rate of the Euro currency.
At least during the reign of Mr Draghi as head of the ECB (nearly 6 years) the regulator has already held 47 meetings on monetary policy, and in the first 10 of them, the governing Council announced significant measures to support the economy in the form of various incentives. Thus decisions about monetary incentives provoked a decrease in the value of the Euro to the dollar.
Another issue is that in December last year, the European Central Bank was already hinting about additional monetary stimulus and the fact the meeting even lowered the interest rates on their deposits to -0.3%, (i.e., made more negative). However, market participants then considered the actions of the European regulator is quite «aggressive», and the Eurodollar rate from that moment began to grow and only now came back to the December levels.
Thus, the key intrigue of the upcoming ECB meeting is whether the financial officials to assure the market of another aggressive incentive arrangements and to further reduce the rate to the Euro or we will again see renewed growth of the Euro against the dollar.
Judging by the rate of the Euro against the dollar, investors still are preparing for the next disappointment. In any case, in recent years, the single currency has always been a fairly accurate indicator of market sentiment: if players are waiting for new stimulus, the Euro falls. If they believe that the ECB actions will be insufficient scale, then the exchange rate remains virtually unchanged. Last month the Euro lost about 2% against the dollar, but it happened after strong growth in early February.
The current market sentiment of disappointment in the upcoming ECB action may well become an ally for Mr Draghi, but only if it would be unexpected for the market. If we assume that the ECB will still announce the expansion of repurchase for another 5-10 billion euros per month (now 60 billion), that may be enough to collapse the rate of the Euro to last year’s lows and direct the movement of Euro-dollar parity by the end of this year. Otherwise, if we do not see such statements again and the ECB will confine itself to half measures, there is reason to expect growth of Euro / dollar, which would mean additional problems for the European Central Bank.
In other words, the growth of the Euro against the dollar by at least 5% will lead to the return of deflation risk, provoked turmoil in the European financial market will bring back fears about the state of the European banking system. Let’s hope that the European Central Bank has learned from past mistakes and past indecision and this time decide to give a volley from all the guns.