Accommodative ECB on Hold

  • This morning the ECB announced no change to its main interest rates (as expected – we also didn’t think a 25bps cut was warranted in the NOV ‘13 meeting).
  • President Draghi reiterated his inflation and economic forecast from last month.
  • Draghi reiterated that the Eurozone may experience a “prolonged period of low inflation” and the Bank would maintain accommodative monetary policy for “as long as is necessary” and to expect that key rates would remain “at present or lower levels for an extended period of time”.
  • Note that Latvia is now the 18th country to join the Euro.
  • To read a copy of Draghi’s prepared remarks click here.

 Investment Positioning

  • As we discussed in a European data update note yesterday, our preferred investment in the region is long German and UK equities (EWG and EWU) and long the Pound/USD (FXB) – note that today the BOE also left the main interest rate unchanged (at 0.50%) and maintained the asset purchase target (as expected), which is supportive of our long call.
  • Broadly, we believe Draghi’s continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market.
  • EUR/USD: we expect Yellen to be a continuation of Bernanke’s dovish monetary policy, yet there was a hawkish tone to the Fed minutes this week which cautions our previous #EuroBull outlook.  We’ll be dependent on our quantitative lines (see levels below) to determine how to position ourselves from here.

Accommodative ECB on Hold - zz. eur usd

 

Matthew Hedrick

Associate


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