It’s Déjà vu Again for the European Currency Markets

It’s Deja vu all over again, with Eurozone spreads widening amid difficult talks over Greece, stock markets under pressure and the euro stubbornly high despite a dovish ECB and a weak economy. So far Draghi’s latest easing package clearly hasn’t had the desired effect and the sharp rise in Portuguese yields amid the flaring up of fresh Grexit fears has highlighted that the Eurozone still remains vulnerable to speculative attacks. What the last year has also shown, however, that heightened activism from the ECB is not the answer, and for now, a calm approach and focus on implementing that which has already been announced, may be the best Draghi can do to stabilize markets.

Less than a month since the ECB announced its new easing package that tried to attack on a broad front, the Euro is higher. Not all measures have been implemented yet, with the corporate bond buying program set to start only next month. So maybe too early to say whether the package will be effective in the medium to long run. The results so far, however, are not encouraging, with market movements since the last meeting only adding to Draghi’s problems, rather than showing any sign that the ECB measures are having the desired effect.

On the currency market front, the EUR remains high. With the Fed stance on the rate hike path softening again, the gap between the ECB’s policy stance and the Fed outlook hasn’t changed that month and the EUR remains stubbornly above 1.13 against the USD. At the same time the U.K.’s Brexit referendum is pushing up the EUR against the GBP and Draghi’s dovish stance is also matched by Japan, which remains on course for further easing.

A deeper cut in the deposit rate than announced was already discussed at the last meeting, the ECB minutes showed. However, if the reaction to the ECB’s latest package, but also the disappointment over the December 2015 announcement has proved anything, it is that market reaction not so much depends on the substance and final impact of the easing steps, but on the announcement effect. Draghi’s mistake in December was that his measures focused too much on details and didn’t make for punchy headlines. This time, disappointment over the modest deposit rate cut and the suggestion that that may hopefully be all that is needed, wiped out any initial positive announcement effect.

Now it is Helicopter money that has captured market imagination and it is probably a good thing that there is no shortage of statements even from the doves at the ECB trying to squash any hopes that the central bank will be going down that route. In the event, more easing from the ECB won’t have much difference, as long as Greek bailout talks continue to drag on, the Fed turns cautiously dovish and Brexit concerns hang over Europe ahead of the June referendum. For now, it may therefore be a good thing to concentrate on what has already been announced, rather than trying to fuel expectations for additional steps.

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