Dovish Draghi Remarks Revive Bund Sentiment, Thwart Euro Bulls

(Bloomberg) -- What the European Central Bank gave with the statement, it took away with a benign inflation outlook during the subsequent press conference.

Bunds sold off and the euro spiked after policy makers dropped a pledge to increase the size of their monthly bond purchases. By the time President Mario Draghi was done with his remarks to journalists, bunds began rising and the euro was deep in the red. The culprit: the central bank’s inflation forecast, revising down the outlook for 2019 to 1.4 percent from 1.5 percent.

The prospects for bunds and support for euro bulls shifted in the space of 90 minutes as investors took the central bank’s comments as an effort to push interest-rate hike expectations well into 2019. It all paints a bullish picture for German bonds, according to Mizuho International Plc. For JPMorgan Asset Management, a shift away from monetary accommodation won’t come before June next year. Money markets still see the first increase to the deposit rate coming in March 2019.

Here is a roundup of analyst views:

Credit Agricole

  • Euro investors are “in limbo,” says Valentin Marinov, head of Group-of-10 foreign-exchange research.
  • They are “itching to go long ahead of the upcoming ECB policy normalization, but mindful of the fact that any aggressive tightening of the euro-zone financial conditions on the back of sharp euro appreciation, could delay any ECB rate hikes.”
  • Timing of the end of QE “is the key driver of the ECB rates outlook and, by implication, the long-term path of the euro,” Marinov says
  • ECB may reach a point, likely in June, where it will have to communicate its plans about QE taper and exit to the markets and may also become the trigger for the next leg higher in the euro

Commerzbank AG

  • Draghi succeeded in striking a dovish tone “as expected after the subtle change to the forward guidance,” says strategist Christoph Rieger
    • “I actually find the changes to the inflation projections more noteworthy”
  • Draghi’s comments on threats to global trade were “clearly another reason for him to stay dovish’
  • “We stick with our view to reduce duration into rallies, but more for U.S. reasons, not domestically”

Mizuho International Plc

  • The cut in the 2019 inflation forecast is bullish for bunds, according to strategist Antoine Bouvet
    • “There is no urgency in removing accommodation given the lack of inflation pressure”
  • Sees the first rate hike coming well into 2019 due to sluggish inflation dynamics

JPMorgan Asset Management

  • “The meeting and press conference were perceived as slightly dovish by the markets,” writes Karen Ward, chief market strategist for U.K. and Europe, in emailed comments
  • Doesn’t see ECB making the shift away from very accommodative policies until the second half of 2019
  • Expects “cyclical and structural forces that will continue to bear down on inflation in the euro zone, including a sizable amount of slack in the labor market”

Societe Generale SA

  • This decision “does not change much, with June continuing to be the key meeting where their cards will be shown more clearly,” says strategist Jorge Garayo
    • “I’m surprised that the selloff in bunds has completely come back to where we started, but clearly Draghi has managed to throw a few caveats that were enough to go back to square one”

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