As expected, the Governing Council of the ECB decided to keep the key ECB interest rates unchanged. The macroeconomic assessment has not changed since January 2018 meeting.  Market participants got only a little update regarding the forward guidance changes, but we see the changes were not encouraged to be on the bullish euro.

The Governing councils decided unanimously to remove the QE bias, it was the major change. Initially, market responded little hawkish to the forward guidance changes, but the euro exchange rate price action was capped by the end of press conference.

The first paragraph of the press release statement has remained unchanged, while the statement about QE flexibility was removed,

From its press release statement, the first paragraph remain unchanged but in the second paragraph removed the QE flexibility statement, “ If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration”.

Key ECB interest rates are unchanged:

As predicted, the European Central Bank (ECB) decided that the interest rates on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively.

Rates time horizon:

In the Press conference, the introductory statement indicated that, “we continue to expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases”.

Non-Standard policy measures:

Furthermore, the Introductory statement also indicated that, “we confirm that our net asset purchases, at the current monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim”.

The key takeaway message of the ECB’s March 08 meeting:

  • The economic analysis, the growth forecast for 2018 was revised slightly up to 2.4% for 2018 from 2.3%
  • The economic growth forecasts for 2019 and 2020 were kept unchanged at 1.9% and 1.7% respectively
  • The inflation projection for 2019 was revised down slightly
  • The headline inflation is expected to come in at 1.4% in 2018 and 1.9% in 2019
  • The exchange rate, Governing Council will continue to monitor developments in the exchange rate

Bottom line: Overall, our view is slightly hawkish. We continue to believe that the market is expecting a clear roadmap for the end of its APP and detailed forward guidance path of the future rate hikes either in April or in June meeting. We also believe the first-rate hike is possibly after March 2019 whereas the markets continue to price around June 2019.

FX forecast: 

We forecast the weekly EURUSD exchange rate to remain largely in its current range 1.2150-1.2500. We also forecast the near-term trend has been tagged with the bulls.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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