Amid a ton of speculation, European Central Bank President Mario Draghi failed to deliver decisive action to the market. ?There was no announcement of massive bond purchases or a change to the region?s current record low rate of 0.75%. ?But, taking a look at the comments following the highly anticipated announcement, there is some solace in the plans that are to come.
First and foremost, ECB President Draghi noted that the region?s central bank is considering purchasing bonds and other assets on the secondary market in order to drive yields lower. ?This isn?t anything new. ?But, the admission of the consideration is reason enough to believe that the worst of the crisis may be over. ?The action would be akin to LTRO programs instituted back at the end of last year and the beginning of this year and remain in line with ?doing ?whatever it takes? to save the euro. ?The asset purchases are in the hopes of keeping short term sovereign rates lower in countries like Spain and Italy, where yields continue to remain above 6% ? a continuing market concern. ?They would also be in addition to primary market purchases that would be conducted by the rescue fund.
Secondly, Draghi additionally admitted to the central bank?s consideration of lowering benchmark rates even further. ?A more traditional tool, this would certainly help to alleviate lending rates across the region ? supportive of potential growth. ?And why not? ?Unlike the US?s Fed, the ECB has at least two more 50 more basis points to go before going with a near zero interest rate policy. ?The measure would ideally be more broad based, and also compliment the secondary markets in keeping sovereign bond yields low.
So, what is Draghi waiting for?
Given the timing of the season, it was highly unlikely for ECB President Mario Draghi to make any real decisive action anyways. ?With the highly touted Jackson Hole Economic Summit slated for the end of this month, it is probably in the interest of ECB?s Draghi to wait and see what Federal Reserve Chairman Ben Bernanke will do in regards to the US?s own economic uncertainty. ?Once that is established, expect the ECB to begin implementing some of its own policies in fighting the crisis.
Ultimately, even through Super Mario wasn?t able to deliver on any promises this time around, expectations are running high for the last three months of the year. ?The sentiment should offer some support for the EURUSD heading into the end of August and even further out. ?This is particularly true as the major currency finds support around 1.2100 and even lower at 1.2000 (an exchange rate untouched since this time last year).
Tags: Draghi, ECB, Euro, European Central Bank, Foreign Exchange, Forex Commentary
Source: http://www.onlineforextrading.com/blog/ecbs-draghi-decision-a-dud/
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