Lower inflation, higher growth and a bunch of caveats
The market was expecting a shift from the ECB but it was much more subtle than hoped.
The ECB may have wanted to signal something more optimistic but they were hamstrung by lower inflation forecasts.
Here's a recap on the GDP and HICP numbers:
Growth:
- 2017 +1.9% vs +1.8% prior
- 2018 +1.8% vs +1.7% prior
- 2019 +1.7% vs +1.6% prior
The prior forecasts were made in March
Inflation
- 2017 1.5% vs +1.7% prior
- 2018 1.3% vs +1.6% prior
- 2019 1.6% vs 1.7% prior
Draghi tried to brush aside those forecasts by emphasizing that the tail risks had dissipated and that the ECB was more confident in the inflation that's forecast.
To some extent the market bought his thinking and that helped the euro from the session low of 1.1195 up to 1.1220.
The takeaway is that it will be a very slow process to a hawkish stance. With inflation at 1.6% in 2019, there's no impetus to hike at all. In addition, Draghi touched on the changes in the world that are keeping wages low. Things like globalization, automation, de-unionization and changes in regulation that are keeping wages down throughout the developed world.
At the same time, I don't think the euro trade is a trade on rate differentials. It's about value. The euro is depressed and eurozone assets are depressed.
Finally, we saw yet-another dip on the back of the press conference and yet again there were aggressive buyers. I'm convinced that everyone is trying to get long euros on a dip and they're hitting increasingly shallow dips because the big retracement to 1.10 isn't coming.