ECB Recap Setting the Stage to Push Back Interest Rate Liftoff

In yesterday’s article, we noted that the European Central Bank meeting had the potential to be a bit of a non-event, and based on todays market’s reaction, that’s exactly what happened (see “ECB Preview: Dovish Surprise Possible, but Draghi Likely to Leave His Options Open” for more).

As widely expected, the ECB’s governing council left all its key interest rates unchanged, made no changes to its forward guidance, and confirmed that it was winding down its asset purchase program this month. Central bank policymakers did clarify that they intend to continue to reinvest the proceeds from its assets “for an extended period of time past the date when [they] start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.”

Despite the mostly as-expected statement, there were a few subtle shifts toward a more dovish outlook. Specifically, the statement noted that "The balance of risks [to the growth outlook] is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility." Combined with the modest bearish revisions to the central bank’s economic forecasts (-0.1% cuts to growth and inflation estimates in 2019), it appears that Draghi and Company may be setting the stage to push back the expected date to start raising interest rates in the next meeting or two.

Technical View

As we expected yesterday, the market had correctly handicapped the most likely outcome, leading to minimal market moves. EUR/USD is still consolidating near 1.1360, directly in the middle of its 1-month range, while Germany’s DAX index closed almost perfectly flat on the day (see my colleague Fawad Razaqzada’s piece “DAX: How will EU stocks react to ECB?” for more). The longer-term trends in both EUR/USD and the DAX continue to point lower, and given the unremarkable ECB meeting, swing traders may prefer to prioritize short positions in the days and weeks to come.

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