EUR/USD Retreats from High After ECB’s Draghi Warns of Uncertainties



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Speaking at a banking conference in Frankfort on Friday, European Central Bank (ECB) President Mario Draghi offered his opinion on a number of issues including Euro Zone inflation, the economy and global uncertainties.

Stubborn Inflation

In his speech, Draghi hinted at the possibility of inflation not rising as quickly as forecast due to Euro Zone entities having to deal with a slew of uncertainties.

Draghi said, “If firms start to become more uncertain about the growth and inflation outlook, the squeeze on margins could prove more persistent.”

“This would affect the speed with which underlying inflation picks up and therefore the inflation path that we expect to see in the quarters ahead.”

Positive Outlook for the Euro Zone Economy

In his talk, Draghi was generally positive about the Euro Zone economy. He also reiterated that the ECB is still on path to unwind its massive financial crisis-era bond-buying strategy by the end of the year. President Draghi also mentioned the resiliency of the current economic cycle and that he saw no reason why the current expansion in the Euro Zone should abruptly come to an end.

Possible Changes to Forward Guidance Due to Global Uncertainties

Carsten Brzeski, chief economist at ING Germany, said in a research note that the ECB President had opened the door for a long period of low interest rates.

“Draghi slightly changed the well-known ECB communication. While there is still a strong determination to end the net-QE (quantitative easing) purchases by the end of the year, Draghi opened the door for changes to the forward guidance in the course of 2019,” he said.

Draghi sounded a little downbeat when he added that at its last meeting in October, the ECB’s Governing Council noted that “uncertainties surrounding the medium-term outlook have increased.”

“When the latest round of projections is available at our next meeting in December, we will be better placed to make a full assessment of the risks to growth and inflation,” he said.

Outlook for Timing of First Rate Hike Uncertain

Draghi’s mention of key issues affecting the global economy casts some doubts about the exact timing of the first rate hike. Although the ECB is due to start raising ultra-low interest rates at the end of summer 2019, the central bank’s decision will ultimately be dependent on incoming data.

Some outside factors that could influence the timing of the rate hike include issues with global trade, name checking protectionism in particular. Draghi also mentioned the temporary effects of weather, sickness and industrial action affecting output in a number of countries.

Trader Reaction

Although German bond yields initially rose on Friday on the back of some of Draghi’s comments, the Euro retreated from its highs with traders perhaps rattled a little by the uncertainty over the timing of the first rate hike and the possibility of a change in guidance.

This article was originally posted on FX Empire

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