ECB: Major shift in stance

President Draghi’s speech on Wednesday was important not because he marked a hawkish shift to policy but because he implicitly signaled that the ECB is not as concerned about low inﬂation any more: it is now considered temporary, according to George Saravelos, Strategist at Deutsche Bank.

Key Quotes

“The language shift is critical because it “liberates” the euro, disinﬂationary strength in the currency may now matter less for the ECB. This language shift coincides with another regime change that has been evolving in recent months and is even more important: the complete breakdown of EUR/USD with rate diﬀerentials suggesting the ECB was losing control of FX anyway. Both these observations are critical because they suggest that the euro can strengthen despite, not because of higher bund yields. In fact, the more the euro appreciates the more ECB tightening will be slowed. The key driver of euro strength is not ECB hawkishness but medium-term rebalancing of structural post crisis underweights in European assets. The ECB may not able to do much about it.”

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