The euro soared to its highest level against the US dollar in almost two years yesterday after the European Central Bank failed to quell market expectations that its long era of cheap money was coming to an end.
Mario Draghi, the ECB president, set out to give the impression during his regular press conference in Frankfurt that no changes were imminent to the ECB’s massive bond-buying programme to stimulate sustained moderate inflation.
Mr Draghi, 69, repeatedly declined to say that policymakers were concerned about the currency’s recent run of strength. Nor did he play down earlier remarks, made at a conference at the end of June in Sintra, Portugal, which markets had taken as a sign that the stimulus programme would soon be wound down.
He said that no firm date had been set for talks on ending the €60 billion-a-month spree and ratesetters had been unanimous in yesterday’s meeting not to change their guidance on monetary policy. He reluctantly confirmed that ECB policymakers would discuss possible changes to bond-buying “in the autumn”, which was enough to excite the currency speculators.
The euro jumped more than 1 per cent against the dollar to $1.1655 — its highest level since August 2015. The pound, meanwhile, tumbled as much as 1.26 per cent to €1.117, leaving less spending power for millions of Britons holidaying on the Continent this summer. European bond yields also rallied.
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Mr Draghi is facing an almost impossible task to convince markets that the ECB will not wind down bond purchases and begin raising rates next year in the face of a much-improved eurozone economy and the end, which he declared in Sintra, of deflationary pressures. He had tried to head off the strengthening of the euro by saying that inflation, the target of much of the stimulus, was not where the ECB wanted it to be.
“We need to be persistent and patient because we aren’t there yet,” Mr Draghi said. “We also were unanimous in communicating no change to the forward guidance and also we were unanimous in setting no precise date for when to discuss changes in the future — in other words, we simply said that our discussions should take place in . . . the autumn.”
It was not clear whether the autumn meant the next governing board meeting on September 7 or the one on October 26 but it did not matter greatly.
Analysts saw Mr Draghi’s performance as a sign that some of his magic was beginning to wear off. He has been credited with doing more than anyone else to save the euro through his promise in 2012 to “do whatever it takes” to shore up the single currency in a speech that began its recovery from the chaos of the financial crisis. Now he has seemingly run out of rhetorical road and the next steps will have to amount to policy rather than verbal action.
“Draghi did his best this afternoon to cap the euro, failing quite spectacularly,” wrote Alex Lydall, head of dealing at the corporate brokerage Foenix Partners.
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Ranko Berich, head of market analysis at Monex Europe, said: “This may be remembered as the day the famed ‘Draghi effect’ finally broke down. Mario Draghi’s ability to immediately have his way with currency and fixed income markets has been overblown for some time. These are no longer the ‘whatever it takes’ days, or the early quantitative easing period when the ECB president could credibly threaten to engage in further easing.
“As a result, markets are trading the euro based on the likely path of ECB policy, which is towards less accommodation and, eventually, higher rates.”
What the experts said
Carsten Brzeski, ING economist “Draghi clearly wanted to put the Sintra dogs back on the leash. It was an attempt to force a calm summer in financial markets by stopping and even rewinding latest taper speculations.”
Richard McGuire, senior strategist, Rabobank “In all probability tapering [of the monthly stimulus spending] will occur as we head into 2018 and we have seen no substantive challenge to that expectation.”
Anna Stupnytska, Global Economist, Fidelity International “Markets have already adjusted expectations towards a firmer path of stimulus removal from here, with gradual and data-dependent tapering of QE likely to start in January 2018. Draghi had little incentive to press the point more aggressively. There is unanimity at the central bank that removal of stimulus should progress with extreme patience.”
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Philippe Gudin, Barclays “Draghi repeated that the relationship between inflation and economic activity and labour market developments has been affected by the financial crisis and that the view of the GC is that this is temporary, although patience and monetary accommodation will be required before inflation will return to target.”