During the ongoing Central Banking Forum in Sintra in Portugal, the President of the European Central Bank - Mario Draghi - had his speech. The deteriorating macroeconomic data together with the falling inflation expectations caused investors to wait for the ECB president to appear.
Mario Draghi, who usually seemed optimistic during press conferences and tried to downplay the problems of the eurozone, now resounded a bit differently. Earlier, the economic slowdown was to be temporary, inflation temporarily lower, but it was to return to the target in the medium term. During today's speech, Mario Draghi said that the ECB toolkit has the opportunity to further cut interest rates. He also added that the risk perspective remains tilted to the downside, and if prospects do not improve, further stimulus will be needed.
As a result of possible additional stimulus, worse prospects or the possibility of cutting interest rates, the euro began to depreciate. The EUR/USD fell to the lowest level in two weeks, beating the level of 1.1200. Meanwhile, in the bond market, the yields on 10-year German bonds have dropped to a record low of 0.293 percent. Moreover, the interest rate market is fully pricing the possibility of interest rate cuts in the Eurozone by 10 basis points by December this year. In turn, in June 2020, the market priced cutting by 15 basis points.
Additionally, inflation in the euro area has been confirmed today at the lowest level in more than a year at 1.2 percent. The previous value is 1.7 percent. What is more, the index of the ZEW Institute concerning the expectations of investors and analysts regarding the future economic situation in Germany has also fallen sharply. The publication for May showed a drop to -2.1 points with market expectations at -5.6 points. This is another blow to the European economy and the euro.
So, at the end of Mario Draghi's term of office, will we see another program stimulating the economy of the euro zone? At this moment, the chances of such action seem to be increasing.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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