Euro sinks after ECB President Draghi talks up downside risks

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9 March 2018

thomasdodds

The Euro was just about the worst performing currency on Thursday after President of the European Central Bank Mario Draghi delivered another dovish assessment of the Eurozone economy.

P
olicy was kept unchanged as expected, although the market was taken by surprise after the central bank removed the line in its monetary policy statement that suggested it could increase its asset purchasing programme if the outlook becomes less favourable. This initially sent the Euro over half a percent higher, however, it was Draghi’s press conference 45 minutes later that set the tone for the rest of the day’s trading.

Draghi continued to reiterate the need for policy accommodation, while emphasising downside risks from abroad. He also again mentioned the risks stemming from a stronger Euro and threats from protectionism that could weigh on the Euro-area economy. Crucially for the common currency, he warned that underlying inflation remain subdued and, as we had anticipated prior to the meeting, issued a modest downward revision to the bank’s inflation forecast for 2019. The bank now expects prices to grow by just 1.4% next year, compared to the previous 1.5% estimate.

Overall, another very cautious set of communications from the ECB. This culminated in the Euro ending trading almost one percent lower, with this downward move dragging GBP/USD with it during a quiet day of activity in the UK. As we have been saying for a number of months, we think that they would need to be a sharp turnaround in inflation for the ECB to even consider the possibility of higher interest rates any time soon.

Will today’s US nonfarm payrolls report support the Dollar?

With yesterday’s European Central Bank meeting now out of the way, all attention will turn to this afternoon’s nonfarm payrolls report to see if the US Dollar can build on its impressive gains from Thursday. The arguments in favour of a strong report appear to outweigh risks that it disappoints. Wednesday’s ADP employment change number was massively above consensus, while initial jobless claims are at multi-decade lows, both of which are encouraging signs. The market is eying a job creation level around the 200k level and mostly unchanged earnings growth.

Even in the case of a weaker than expected labour report today, we do not expect much of a negative reaction in the greenback, given the market is currently placing a 100% chance of an interest rate hike from the Federal Reserve at its March meeting. We think we would need to see an extremely weak report to dissuade the market that Fed will raise rates on at least three occasions in 2018.