Fra Zerohedge:
The euro has slumped to session lows following the release of the latest ECB Minutes, which were unexpectedly dovish and echoed the Fed’s worries about growing trade war, noting “widespread concern” about the the potential impact of protectionism. In other words, the more aggressive Trump is with China on trade, the fewer rate hikes and less tightening to come.
More specifically, addressing the recent rise in the Euro, the ECB said that FX is a source of uncertainty, although “past appreciation has not had a marked impact on demand” and added that euro strength was not fully due to macro environment, and worse, “may have a more negative impact on inflation.”
Draghi’s henchmen also toed the party line saying that “gradual communication adjustments are required.” The minutes also revealed that the inflation path close to sustained adjustment, but “majority say it is not sufficient” and as a result “Monetary support still required after the end of bond purchases.”
A detailed breakdown:
While the text was largely token, one reason for the dovish read was the following headline:
- ECB SAID REMOVAL OF EASING BIAS ‘SHOULD NOT BE MISUNDERSTOOD’
… although the full context was more neutral than the initial read: “it was also remarked that the removal of the easing bias should not be misunderstood as restricting the Governing Council’s capacity to react to shocks and contingencies, if necessary.”
However, the initial reason for the slump in the Euro was the ECB’s assessment that inflation still isn’t there. Indeed, unlike the Fed which is clearly comfortable that reflationary pressures have taken hold, the ECB was nowhere near as convinced.
“The view was put forward that the Governing Council’s criteria for a sustained adjustment in the path of inflation could be assessed as close to being satisfied over a medium-term horizon. However, the broadly agreed conclusion was that the evidence for a sustained rise in inflation towards levels consistent with the Governing Council’s inflation aim was still not sufficient.”
The ECB also voiced concerns of the Euro:
“Some caution was voiced, as the more recent developments in the euro exchange rate and in financial conditions in part reflected changing perceptions about monetary and fiscal policies, domestically and globally, as well as rising risks of protectionism and heightened market sensitivity to communication, rather than further improvements in domestic economic fundamentals.”
Finally, going back to the key topic, the ECB’s worries about trade and wider global risks:
“the balance of risks to the global economic expansion was still assessed to be tilted to the downside, as geopolitical uncertainties and uncertainty regarding the policy outlook in some major economies – including the risk of increased trade protectionism and the uncertain impact of the United Kingdom’s withdrawal from the EU – continued to constitute downside risks.”
“There was widespread concern that the risk of trade conflicts, which could be expected to have an adverse impact on activity for all countries involved, had increased…”
In response to the unexpectedly dovish ECB minutes, the euro quickly slumped to session lows.
