Draghi Propels Euro Higher

By Sam Mattera
Benzinga Guest Writer

On Thursday, the European Central Bank opted to keep its key interest rate unchanged at 1%. The EUR/USD pair rallied, breaking above $1.28 in early trading.

In a subsequent press conference, the president of the ECB—Mario Draghi—spoke of his expectations for the Eurozone and the state of the economy in the euro area.

Draghi stated that the Eurozone’s economic outlook was facing substantial downside risks, with overall Eurozone unemployment edging up near 10%.

Draghi laid hope for the Eurozone on further fiscal consolidation, saying that a fiscal compact was unavoidable at this point, and that such an agreement must have unambiguous wording. He said that the decision to leave the rate unchanged was unanimous. Draghi would not comment on the specifics of the decision, noting that the ECB never comments on interest rate decisions.

Austerity was addressed. Draghi urged European politicians to continue their policies of fiscal tightening, and work to reduce excessive government deficits.

Recently, the Greek situation has flared up once again, as speculation rose over the possibility of whether all creditors involved would go ahead with the “voluntary” 50% haircut deal. Draghi commented on the Greek situation, but said it was “unique.”

Meanwhile, a lawmaker in Germany’s CDU (the party of German Chancellor Angela Merkel) stated that Greece would never be able to repay its loans. The lawmaker went so far as to call for the expulsion of Greece from the Eurozone.

Ultimately, this rhetoric is not new, as many conservative German politicians have made similar comments in recent weeks.

Draghi also touched on the upcoming second LTRO—the first of which was conducted last month.

The first LTRO may have been seen as a success, as the rates on European bonds have subsequently fallen—the major intention behind the operation. He said that the ECB expects “substantial” demand for the upcoming second LTRO. If Draghi is correct, traders may expect the yields on European bonds to fall further.

In terms of inflation, Draghi stated that the ECB believed that inflation would stay above 2% in coming months, but then gradually decline.

Overall, investors may have had little take-away from the press conference, as nothing new was promised from the ECB. Overall, Draghi made the same vague platitudes, urging governments to curb deficits and create solid financial firewalls.

The results of the second LTRO may do much in terms of the euro’s value. If the yields on European government debt instruments continue to fall, then the euro may rally—especially given the tremendous short interest in the currency. Of course, the ECB made no new promises, and so pressure may remain on the currency for quite some time.

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