Currency Watch: Defiant Draghi holds

Mario Draghi, the ECB President, has decided to hold Europe’s feet closer to the fire by refusing to cut interest rates in Europe.

All things considered, we thought that the rest of the council would overrule and a cut would be forthcoming. It seems like Draghi got his way in the end (although the vote was by consensus and therefore not unanimous), with the tone of the press conference not antagonistic, but certainly assertive as to where further decisions need to be made; and it wasn’t the ECB.

Draghi told the assembled journalists that “some euro problems have nothing to do with ECB policy” and EURUSD and other risky assets saw that as confirmation that no extraordinary measures would be forthcoming from the ECB. They were right, although the major price action was seen as a result of Draghi’s insistence that the ECB is watching the data closely and stands ready to act.

Risk rallied hard after that statement from the President as investors continue to believe that some form of stimulus is only just round the corner. I don’t think there is anyone out there who believes European economic data is going to get better anytime soon and so, ceteris paribus, we should see some stimulus from the ECB. Further impetus is also expected from the Federal Reserve when they meet later in the month and this will also be helping the general risk-on flows.

The Bank of England meeting has also just taken place. There will have to be further quantitative easing in the UK economy eventually but for we will have to wait. Data from the UK  has continued to deteriorate between the previous meeting and the time of writing and so has the state of the global economy. The Bank of England has previously taken a pro-active stance in an attempt to try and protect the UK and were we to have a vote we would have cast it for an additional £50bn of asset purchases at this meeting.

It seems that the committee have sided with hope this month. The Bank will not want to look like it has been “told-off” by the IMF and is reacting to their calls for further easing whilst some members have said that the previous injection simply hasn’t had time to work its way through into the economy yet. Inflation has dipped in recent months, thanks to oil prices and sterling’s rally, but still remains a risk.

FX markets are in a holding pattern at the moment with investors waiting on the Greek election, the G20 meeting and the Federal Reserve’s June rate decision but do not expect any of these to represent a panacea.