The euro started to rise after Mario Draghi’s Press Conference and the ECB meeting on Thursday on the 7th of March. Markets assume that the statement of the head of the European Central Bank was not mild well enough.
The day before many analysts announced that Draghy might try to make the euro weaker verbally, taking into account real threat of recession in one more quarter to the euro zone. Some experts said that Central bank might decrease interest rate to new record low 0.50%.
But the rates were not decreased, and as investors thought Mario Draghy was very optimistic, when announced that euro zone economy started to recover. He also didn’t stint his praises of the European leaders, which fight against budget disbalance. What is more, Draghy didn’t express anxiety concerning exchange rate of a Single European currency. He noted that only stable strengthening of the euro might increase inflation risks.
In my opinion, it is understandable that Draghy didn’t make a wave of pessimism. Somber tirades from mouse of the head of Central Bank is undoubtedly effective method to lower exchange rate of the euro and thereby help European experts, but this method may result into bad side effects, which beat all benefits from lowering the currency. This effect is euro zone confidence falling.
Markets are struck by weak macro-economic reports, which are released in the regions one by one: business activity remains very low, and unemployment makes one by one records. And there is also political collapse in Italy – real threat to business crisis intensification, moreover, even more considerably than it was before (third and fourth E-17 economies – Italy and Spain – may simultaneously lose excess to loan markets). If the head of the ECB started to draw attention to euro zone problems in this situation, it might make the situation in debt market of euro zone more stable… Of course, Mario Draghy tried not to dramatize.
Nevertheless, if ones read his statement attentively, it is understandable that the euro will unlikely rise. Some moments directly notes: chances of lowering interest rate increased. Draghy confessed in Management Council there are discussions about lowering interest rates and also negative deposit rate. And in take into account that the main forecast of the ECB of the CPI index for 2013 is at the level of 1.6%, and for 2014 – lowered to 1.3%,though crept into one’s mind that Draghy and his team would be forced to take actions in order to push inflation to the target level 2%… Moreover, forecast of euro zone GDP growth has been reviewed at this meeting again: for the present even according to the most optimistic forecast economic growth will be negative in the end of 2013.
Yes, one can’t believe in euro’s ability to rise. Maybe markets also feel it. Not for nothing the EURUSD currency pair lost almost all that it had taken on Thursday…
Image source: businessweek.com