Draghi: Transitory factors were holding back inflation - BBH

ECB President Draghi told the audience at the annual ECB Forum transitory factors were holding back inflation which was quickly understood to be bullish for the euro, and it rallied from near the session lows below $1.12 to around $1.1260, a nine-day high, notes the analysis team a BBH.

Key Quotes

“To be sure, Draghi still argued that a "considerable degree of monetary accommodation is still needed" because inflation is not yet "durable and self-sustaining."  Nevertheless, by providing a context for the low inflation, Draghi fanned expectations that the ECB is will likely announce tapering as it extends its asset purchases into next year.  There is some concern that the scarcity of German paper may also hamper efforts to extend the asset purchases much beyond the middle of next year, without changing tactics.”  

“The $1.1285-$1.1300 area capped the euro in the first half of the month.  The euro had fallen to $1.1120 a week ago and recovered before the weekend to $1.1200.  The dollar, we had suggested, was vulnerable even before Draghi pushed the open door.  Technically, it is important that the euro makes a new high above $1.1300.  If it does not, the price action will give the appearance that a more complicated topping pattern in the euro is unfolding (head and shoulders top or some derivative of a triple top).”  

“Draghi's comments have also spurred a sell-off in European debt instruments.  Two-year benchmark yields are 2-3 bp higher, while 10-year yields are 2-4 bp higher.  Although US yields are firm, European rates are rising faster, spurring a narrowing of the US premium.  At the same time, the higher yields are corresponding to weaker equities, though the market was heavy before Draghi's comments.”