ECB Minutes from last meeting just released 22 Feb
Cue a rally and fade for the euro. EURUSD up to 1.2309 and back just as fast to 1.2280
As always it pays to have your orders in, or levels ready and fingers poised. We've been highlighting the publication in various posts.
- changes in communication is premature
- policy will evolve to avoid abrupt, disorderly adjustment later
- communication stance could be revisited in forthcoming meetings
- increasingly confident about inflation but patience required
The essence of the Minutes are revealed at the post-announcement Draghi presser but the algos love a headline.
Here's a bit of elaboration from the ECB on FX rates discussion:
- A number of remarks were made about recent exchange rate developments. While the euro exchange rate was not a target of ECB policy, movements in the exchange rate were deemed important insofar as they affected the outlook for growth and inflation in the euro area. It was also recalled from earlier Governing Council discussions that it was important to take into account the main factors behind the euro's appreciation, as the impact on activity and prices of a change in the exchange rate differed depending on the underlying causes.
- Part of the exchange rate appreciation could be related to more positive sentiment towards the euro area, resulting from improvements in the euro area economy. It was argued that an exchange rate appreciation linked to positive developments in domestic demand could be expected to have a lower pass-through to inflation, as firms would likely use the strength of the economic situation as an opportunity to rebuild their profit margins, which they had reduced during the crisis. However, more recently the euro's appreciation also reflected other factors, including communication on exchange rates and on the monetary policy outlook across major currency areas. In such cases, the pass-through to inflation could be stronger.
- It was also pointed out that the bilateral exchange rate of the euro against the US dollar had changed more than the euro's nominal effective exchange rate. This had led market participants to attribute recent exchange rate volatility more to the weakness of the US dollar than to the strength of the euro. However, explaining the US dollar weakness was not straightforward, given the strength of recent data releases and the fiscal and monetary policy outlook in the United States.
- This also had to be taken into account when considering the consequences of the exchange rate appreciation for the euro area economy. In addition, an appreciation relative to an invoicing currency such as the US dollar could be more important for the strength of the pass-through than suggested by its weight in the effective exchange rate.
- Concerns were also expressed about recent statements in the international arena about exchange rate developments and, more broadly, the overall status of international relations. The importance of adhering to agreed statements on the exchange rate was emphasised, such as that included in the October 2017 communiqué of the 36th meeting of the IMF's International Monetary and Financial Committee, which stated that excessive volatility or disorderly movements in exchange rates could have adverse implications for economic and financial stability, and that members would refrain from competitive devaluations and would not target their exchange rates for competitive purpose
Full Minutes here
