Draghi’s Speech Gets Debunked, Euro Slides - FX Leaders News
Economy is good, but I can't promise any rate hikes this decade

Draghi’s Speech Gets Debunked, Euro Slides

Posted Friday, July 27, 2018 by
Skerdian Meta • 2 min read

Yesterday, the ECB had its usual meeting. They kept interest rates unchanged at 0% as widely anticipated and Mario Draghi delivered his speech. The Euro jumped 40 pips higher at first, but it reversed as Draghi continued his speech. So, what is the market’s take from yesterday’s Draghi speech?

Well, the EUR/USD is about 100 pips lower, so the main take is that Draghi sounded more dovish than hawkish. There were both hawkish comments as well as some dovish ones, but the market is leaning towards the dovish side.

  1. Earnings – Mario Draghi sounded optimistic about wages. He said that negotiated wages in particular have been growing and considerably and the outlook is positive. So, worker’s unions are not such a bad thing after all. They help push wages up when employers are not willing to.
  2. The Recent Data – The economic data from the Eurozone during the first half of 2018 showed that the Eurozone economy softened somewhat. But, that was a give-back from the strong economic expansion late in 2017 which came from strong exports according to Draghi, so he brushed it aside.
  3. First rate hike next summer? – The ECB members have highlighted that the first rate hike is likely going to be in next summer. The market was expecting some sort of confirmation or perhaps an earlier day. Spring maybe? But Draghi said that through the summer means exactly that. So, no earlier date and confirmation. Through the summer might as well mean at the end of it or even after summer next year.

4. Markets Are Right – The ECB President also said that the market has its pricing for the first rate hike right. The market is priced nearly 60% for the first rate hike next summer. Draghi said that the markets are right on that, but that doesn’t mean that the ECB is going to hike interest rates next summer. The ECB didn’t make a promise to hike rates next summer, if the data doesn’t support it, then next summer can go right out the window for that matter.

So, the economic outlook regarding growth and wages is positive for the ECB. But the outlook of the monetary policy doesn’t look very hawkish to the markets. Markets were waiting for a strong confirmation about the beginning of rate hikes and they didn’t get that. This has put the Euro on a soft patch, although the decline in EUR/USD is also prone to the strength in the USD in the last few sessions. However, the verdict is that Draghi sounded more dovish than hawkish for the Euro.

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About the author

Skerdian Meta is our Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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