On Thursday, Mario Draghi pulled off a magic trick. He convinced markets to look through the omission of the reference to further rate cuts and the more rosy assessment of the economic outlook by lowering the ECB’s inflation forecast.
Ultimately, the market read Draghi (and the presser) as dovish. The result: a fresh June low for the euro.
Here’s Bloomberg’s recap:
EUR/USD fell to a fresh low for June, slipping to 1.1166 with little fanfare in morning trading, then briefly rebounded back above 1.1200. Macro and model-driven accounts continue to trim EURlong positions after the shared currency extended its drop following its failure to breach its post-election high at 1.1300.Remarks from ECB’s Nowotny that there is “risk that inflation rates come in even lower if I assume a further increase of the euro exchange rate, which would be inflation dampening” added to the cautionary tone aired by Draghi Thursday. On that day, the ECB trimmed its inflation outlook while acknowledging recently robust economic data, a step that weighed on the shared currency.
Was this a mis-read by markets? You’ll recall what we wrote earlier this week in “Josephine Witt’s Reign Is Over Or, Central Banks May Actually Mean It This Time“:
Recently, you kinda get the impression [central banks] are going to try and dig themselves out of this for real. Because it’s getting increasingly difficult to deny the market distortions they’re causing whether it’s absurd equity valuations, credit spreads that are increasingly detached from fundamentals, bonanzas for carry traders and vol sellers, etc.
“For good reason, we’ve gotten used to taking everything with a grain of salt,” Bloomberg’s Richard Breslow wrote on Wednesday, referencing central banks’ multiple hawkish bluffs. “It’s probably better to err now on giving them a serious dose of the benefit of the doubt.”
