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EURUSD Rallied to Fresh 14-Month High as Draghi Promised QE Discussions in Autumn

ECB left interest rates and the QE program unchanged in July. The members also decided to keep the QE reference in the forward guidance. The central bank indicated it would continue buying assets in the market for some time and President Mario Draghi admitted that "inflation is not where we want it to be, nor where it should be" and "that’s why a substantial degree of accommodative monetary policy is still needed". The single currency plunged after the dovish statement. However, it reversed to gains and jumped to a fresh 14-month high against USD after Draghi indicated that QE discussion would begin in autumn.

The central bank kept the main refi rate, the marginal lending rate and the deposit rate unchanged at 0%, 0.25% and -0.4% respectively. The central bank also affirmed that the QE program would be maintained at the monthly pace of 60B euro, which is "intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim".

At the press conference, Draghi acknowledged that the economy is experiencing "a robust recovery where we only have to wait for wages and prices to follow course". He added that "while the ongoing economic expansion provides confidence that inflation will gradually glide toward levels in line with the inflation aim, it has yet to translate into stronger inflation dynamic" and "a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up".

In the accompanying statement, ECB reiterated that "if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration". A few weeks ago, Mario unveiled that the members had discussed over the possibility of removing the forward guidance of expanding and extending QE purchases, triggering market speculations that they would do so in July.

While leaving the policies and statement unchanged, Drahi promised QE discussions to begin in autumn. However, he refused to comment whether it means the September 7 meeting.

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