Forex Flash: Angst of the Week - Nomura

Nomura economists Nick Matthews and Silvio Peruzzo have taken the time to reflect on yesterday´s ECB Press Conference and Q&A session with President Draghi.

They begin by noting that the ECB press conference was incrementally more dovish compared with last month as weaker projections led to a loss of unanimity on rates, but not by enough to trigger a cut. They add that those against lower rates continue to put faith in recovery, leaving the market in data dependent mode, although they do not think the data will be weak enough for the ECB to cut in April. Furthermore, they write, “Despite the loss of unanimity, we see no other major signals that strongly suggest the ECB intends to cut rates next month.”

They add that continued emphasis on medium-term expectations suggests these have to change for the ECB to act, putting the spotlight on June‟s Eurosystem staff projections as the next major evaluation of the outlook. They continue to expect the refi rate to be cut by 25bp at this meeting. They comment that Draghi says that the ECB is to remain accommodative and in full allotment mode for as long as is needed - a weak form of forward guidance - a possible trade-off for those pushing for lower rates.

Matthews and Peruzzo add that the removal of the exchange rate as a downside risk to inflation might reflect that the ECB is now more comfortable with the level of the euro where it is or that the new forecasts now fully reflect the recent appreciation. They finish by commenting that, “Transmission mechanism remains the number one focus but there still appears no easy answer to this problem, at least from the ECB‟s standpoint. June could still bring about some additional measures in our view.