Euro-zone central bankers are unhappy with Draghi’s “leadership style”, especially around the release of the hint about the ECB’s balance sheet. When the headline hit the wires, EUR/USD leaped on fears that Draghi couldn’t be able to deliver QE or any additional monetary stimulus.
But perhaps the German Bundesbank, which is most likely behind the publication, just vent their frustration or more precisely, show the German public that their institution is fighting to maintain the orthodox anti-inflationary policy stance? If this was indeed just a spin, this EUR/USD rally could be a sell opportunity.
Political Considerations
That Reuters article that rattled markets said that “At least seven and possibly as many as 10 of the 24 council members are against U.S.-style quantitative easing” and that despite this majority, “the ECB sources said it would be politically explosive for Draghi to try to force QE through in the multinational euro zone by such a narrow margin”.
So, Draghi has a majority but the better way to go would be to seek consensus, especially when the opposition comes from Germany, the largest country in the euro-area. The ECB is modeled after the Bundesbank and at least in Trichet’s times, it certainly seemed so.
German Bundesbank meets reality
But can the Bundesbank ignore reality? The ECB has a “2% or a bit below” target. euro-zone inflation stands at only 0.4% in October. But it’s not only energy prices: core CPI stands at 0.7%, that’s also too far. And is Germany very different? Not at all: German HICP stands at 0.7%.
The European Commission’s fresh forecasts see inflation at 0.5% this year and 0.8% in 2015. The picture for Germany isn’t much brighter, not in growth and not in inflation.
All this comes before the upcoming effect of falling oil prices in October and November hits the markets. And if rising oil prices (and fears of secondary effects) in Trichet’s era justified two rate hikes in 2011, falling oil prices should just justify more action to battle low-inflation, shouldn’t they?
ECB action on Thursday
Draghi’s big bazooka, the OMT which followed the “everything it takes” speech is widely considered to having saved the monetary union in 2012. Another bazooka, in the promise of more euro printing could therefore come despite the kicking and screaming from Weidmann and co.
And in the current situation, with Japan going all-in on QE, the ECB may have no choice but to shoot with this bazooka. Shooting it would aid the economy: first via a weaker value of the euro and later via effects on the real economy.
German politicians might fell happy now with the drop in unemployment at home, but this could quickly turn sour if Germany slips into a recession.
Conclusion
It seems to me that this bombshell is meant to show that German Bundesbank is not falling without a fight, and that this show is directed outside, to the German public, and not inside, to the ECB Governing Council.
Therefore, in his third anniversary as ECB president, Mario Draghi is likely to continue working hard, hinting of more action in the pipeline.
If this assessment is correct, the resulting rally in EUR/USD (which hit resistance at 1.2570 at the time of writing) could serve as a sell opportunity ahead of the ECB decision on Thursday.
What do you think? Here are two different opinions
- We Went Short EUR/USD targeting 1.18; ECB – BNPP
- EUR/USD: We Went Long Targeting 1.31; Position For A Bounce – Credit Agricole