For Traders, Draghi Wasn’t Dovish Enough as Rate Cut Priced In
The ECB changed its forward guidance to add that its negative deposit rate could go even lower.
(Bloomberg) -- The euro recovered from a two-year low and bonds reversed gains after Mario Draghi said the European Central Bank had not considered an interest-rate cut today and that the risk of recession was “pretty low”.
German and French bond yields rose from record lows after President Draghi said it was difficult to be gloomy at a press conference and noted differing views within the Governing Council on the policy outlook. Those remarks followed a statement from the ECB that flagged a possible rate cut and a fresh round of asset purchases in coming months.
The ECB changed its forward guidance to add that its negative deposit rate could go even lower, and offered hints that more stimulus including quantitative easing may be coming. Money markets are now pricing 12 basis points of rate cuts in September, slightly down from 14 basis points on Wednesday, while a further cut is still expected in January.
“Markets have priced in a lot of dovishness from the ECB by now,” said Andreas Steno Larsen, an analyst at Nordea Bank Abp. “The moderate positive reaction in euro-dollar is a sign of that.”
The euro rose 0.2% to $1.1160, after falling to the lowest since 2017 in volatile trading. German 10-year yields rose two basis points to -0.36%, having broken below the ECB’s minus -0.40% rate after the ECB statement. Bank stocks rallied as the ECB will consider measures to offset the squeeze on lenders’ profitability from negative rates.
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Investors will next turn their attention to the Federal Reserve and Bank of Japan policy decisions next week. Central banks across the globe have signaled their willingness to restart policy easing in the face of slowing economic output, though Draghi said there are signs of resilience in the labor market.
“Some of his comments were also more optimistic,” said Georgette Boele, senior foreign-exchange strategist at ABN Amro Bank NV. “Markets have tested previous lows but were not able to push much lower.”
--With assistance from Susanne Barton.
To contact the reporters on this story: John Ainger in London at jainger@bloomberg.net;Charlotte Ryan in London at cryan147@bloomberg.net
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee
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