The EUR/USD rate fell to around two-year low after the decision of the European Central Bank on monetary policy and after the publication of the latest macroeconomic projections, which were lowered, showing how significant the slowdown is in the euro area.
The ECB and Mario Draghi have underestimated the possibility of a significant slowdown in the European economy for a very long time, claiming that inflation and growth in the future will be higher. Now, to make up for lost time for conservative action, Mario Draghi once again pulled out a bazooka. As a result, the nickname Super Mario will remain in the minds of investors long after the end of Mario Draghi's term. It is worth mentioning that in October Draghi will stop being the head of the ECB and will be replaced by the current head of the International Monetary Fund, Christine Lagarde.
After the meeting on September 12, the European Central Bank decided to lower the deposit rate by 10 basis points from -0.4 to -0.5 percent. while leaving the reference rate at 0.0 percent and the rate on the marginal lending facility at 0.25 percent The statement states that the Governing Council now expects the ECB's key interest rates to remain at their current or lower levels until inflation outlook approaches close to, but below, 2 percent.
What's more, it was decided to resume the asset purchase program for EUR 20 billion per month, and the program was scheduled for November 1. No QE end date has been set, so quantitative easing can take months or years. QE is to be completed shortly before the ECB raises interest rates.
In addition, the European Central Bank will change the rules for cheap loans for banks called TLTRO (Targeted Long-Term Refinancing Operations). The rules for the new series of quarterly, targeted, long-term refinancing operations will be changed in order to maintain favorable conditions for granting bank loans - statement says.
All these activities and poor macroeconomic projections, about which in a moment hit the euro. The EUR/USD exchange rate fell towards this year's low below 1.0930. The support from early September after 15:00 were defended, but market reaction and volatility showed the importance of today's decision and, moreover, met the expectations of investors from the fx options market, which we wrote in previous comments.
Returning to macroeconomic projections, the ECB lowered inflation expectations for 2019 from 1.3 to 1.2 percent, in 2020 from 1.4 to 1 percent and in 2021 from 1.6 to 1.5 percent Meanwhile, growth projections have been reduced in 2019 from 1.2 to 1.1, in 2020 from 1.4 to 1.2 percent, and in 2021 they were maintained at 1.4 percent. This can be summed up by the disinflationary phase of the economic slowdown, which, unfortunately, may end in a recession in the worst case scenario. However, Christine Lagarde will have to deal with this already.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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