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Euro Rebounds as ECB Underwhelms; Draghi Faced Opposition to QE

James Hyerczyk

The question that Euro traders may be asking on Friday is why did the single-currency rally after the European Central Bank cut its deposit rate by 10 basis points and announce it would restart bond purchases at a rate of 20 billion Euros a month starting November 1? The easy answer is the move was already priced into the market.

This explanation works for chart watchers because the low on September 13 was 1.0927, just slightly above the 1.0926 bottom on September 3.

It was reported that the rate cut was widely expected, but according to analysts, the revived bond purchases were a surprise. However, rolling back to the news on September 3 when the Euro was getting crushed, we see that there were actually no surprises in yesterday’s ECB decisions. In my opinion, the ECB may have actually underwhelmed investors.

On September 3, Reuters said “The Euro touched a 28-month low against the dollar as investors priced in deeper negative interest rates for longer in the euro zone.”

“Money markets has ratcheted up to 83% the probability that the European Central Bank will cut its benchmark rate by 20 basis points when it meets next week. It now stands at minus 0.40%.”

“The ECB has also all put promised a monetary policy stimulus package, including new quantitative easing, as economic growth falters and Germany’s manufacturing drops into recession.”

Nine days ago, traders were pricing in a 20 basis point rate cut, the ECB delivered a 10 basis point cut. The quantitative easing was expected. However, it was the least one could have expected and certainly not the aggressive action short-sellers were expecting.

Draghi Underwhelms

Since the EUR/USD rebounded from its low when ECB President Mario Draghi started his press conference, I have to conclude that the short-sellers were not impressed by what he was saying as he tried to deliver the message from policymakers.

Draghi was also hurt by a headline from Bloomberg that said he faced opposition from several key ECB governors in his ultimately successful bid to restart quantitative easing, according to officials with knowledge of the matter.

Core Europe Resisted Quantitative Easing

According to Bloomberg, “Bank of France Governor Francois Villeroy de Galhau joined more traditional hawks including his Dutch colleague Klaas Knot and Bundesbank President Jens Weidmann in pressing against an immediate resumption of bond purchases.”

“Other dissenters included, but weren’t limited, to their colleagues from Austria and Estonia, as well as members on the ECB’s Executive Board including Sabine Lautenschlaeger and the markets chief, officials speaking on condition of anonymity said.

Key Argument Against Draghi’s Resumption of QE

According to Bloomberg, “One key argument wielded by policy makers opposed to Draghi’s resumption of QE was that it would be better to save it to use as a contingency in an emergency, such as an abrupt outcome to Brexit if the U.K. leaves the European Union without a transition deal, the officials said.”

Problems For New President Christine Lagarde

“Draghi’s decision to press ahead without such key support risks leaving Lagarde with a headache when she starts in November. She will need to decide whether to persist in a policy that has divided her Governing Council, risking further acrimony. The alternative would be to dial back the ECB’s stimulus commitments, an approach that could provoke a market backlash,” according to Bloomberg.

This article was originally posted on FX Empire

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