With Mario Draghi announcing a growing confidence the Euro area’s prospects, the Euro currency didn’t exactly follow suit. Since last week the single currency has fallen from $1.08440 to near $1.06500 at the time of writing.
Clearly, traders had priced in the potential for a much larger tapering announcement at this meeting. However, the sell-off hasn’t diminished the Eurozone’s appeal this year.
The ECB will cut its bond-buying from 80 billion to 60 billion in April 2017, and seek to extend this program until he end of the year.
Traders have clearly reacted to Draghi’s concern that the current trend in inflation is highly correlated with the increase in energy prices, and that monetary policy may still be needed for support. In this context, the current euro sell off makes sense. However it could be viewed that Draghi was playing his cards close to his chest.
Amidst all the claims of currency manipulation, it cannot be argued that the current exchange rate for the Euro against the dollar is very favourable for the Eurozone. The ECB may see an opportunity here by using rhetoric to suppress the single currency just enough for a possible inflation overshoot – while starting the process of reeling in the asset purchases now. Viewed like this, Draghi has played this move very well.