03/09/17 10:56 AM EST

ECB’s March Meeting – Accommodative Policy is Addictive! Short EURO

Matthew Hedrick

Investment Conclusion: Short EUR/USD (FXE)

ECB head Mario Draghi didn’t disappoint us in today’s presser, underlining a sustained commitment to an “accommodative” policy (read dovish), which we believe will continue to drive the EURO lower in conjunction with our outlook that the #TrumpTrade will continue to strengthen the US Dollar.

It’s what Draghi did not say today that stands out:

Draghi did not outline a defined termination to the bank’s asset purchase program (QE), saying asset purchases of €60B billion per month will run “until December 2017, or beyond if necessary, until there’s a sustain adjustment to path to inflation”.
Draghi did not rule out increasing QE, saying the bank “may increase size or duration of the asset purchase program based on underlying conditions”.
Draghi did not define any path to higher rates in the future, reiterating a familiar mantra that “interest rates to remain at present or lower levels for an extended period of time”.

EUR/USD Positioning: trading risk range of $1.04 to $1.06 with a bearish intermediate term TREND bias (TREND is broken at $1.09):

Broader Eurozone Assessment - The Ugly Quad 4 Cometh:

Our outlook on the Eurozone diverges from the ECB’s higher growth and inflation expectations outlook released in today’s presser:

Specifically, the ECB’s staff updated its economic projections for growth and inflation higher:

Eurozone GDP 1.8% in 2017 (vs 1.7% in December projection), 1.7% in 2018 (vs 1.6% prior) and 1.6% in 2019 (UNCH vs prior)
Eurozone CPI HICP at 1.7% in 2017 (vs 1.3% in December projection), 1.6% in 2018 (vs 1.5% prior), 1.7% in 2019 (UNCH vs prior)

Yet also note that this week the OECD released its Eurozone Projections that saw growth come in:

GDP at 1.6% in 2017 (UNCH vs prior NOV estimate but below 1.7% achieved in 2016) and 1.6% in 2018 (a -10bps reduction vs the prior estimate)

As our Hedgeye proprietary GIP (growth, inflation, policy) model below shows, we see Eurozone growth and inflation anchored in Quad 4 in Q2 & Q3 this year, indicating growth slowing as inflation decelerates.

We continue to expect Draghi and the ECB to come up short of its intended goal of stimulating real growth in the underlying economies via QE.
We expect the political risk in the region, from Brexit to the upcoming key elections in Netherlands (March 15^th); France (April 23^rd & May 7^th); and Germany (September 24^th) portending a rise of Euro-skeptic parties that may, at a minimum, fracture consumer and economic confidence, and at a maximum completely upend the Eurozone project.
We believe tougher Eurozone inflation comparisons (see second chart below) and a stronger dollar choking out rising energy prices (that greatly contributing to the overall CPI number) will dampen inflation.

Further below in the charts we breakout our growth and inflation projections vs consensus.