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Further ECB easing likely but will it impact Euro? - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 16, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Lee Hardman, Currency Analyst at MUFG, suggests that the tentative improvement in global investor risk has helped to ease upward pressure on the euro.

    Key Quotes

    “The euro has also been undermined by further dovish comments yesterday from ECB President Draghi at the European Parliament’s economic committee. President Draghi provided a further strong signal that the ECB is likely to ease monetary policy at their next meeting on the 10th March. He stated explicitly that a strong effort by all policymakers will be needed in the months ahead. The ECB will not hesitate to act if needed if it judges that downside risks to inflation have increased.

    President Draghi highlighted two specific areas of concern that the ECB will analyse when assessing the need for further easing. The ECB will examine the strength of pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. The ECB will analyse as well the state of the transmission of their monetary policy by the financial system and in particular banks. President Draghi attempted to provide some reassurance that “in the euro area, the situation in the banking sector is now very different from what it was in 2012” highlighting that euro-zone banks have increased their core tier one capital ratios from 9% to 13%.

    Recent negative developments have increased the likelihood that the ECB will ease monetary policy more aggressively in March. The market is expecting at least a 0.10 percentage point reduction in the deposit rate which on its own would likely leave the market disappointed. More aggressive easing will likely be required to weaken the euro more materially and even then in the current market environment the effectiveness of further ECB easing at weakening the euro is uncertain as the recycling of the euro-zone current account surplus is complicated.

    Real yields in the euro-zone have increased since late last year as inflation expectations have fallen proving support for a stronger euro. It is an unwanted development for the ECB which requires a stronger policy response to support inflation expectations. Nominal yields outside of the euro-zone have also recently fallen by less than in other major economies which has increased the relative appeal of the euro in the near-term.”
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