One look at the recent Citi Eurozone Economic Surprise Index, which as shown below, recently plunged to 6 year lows, confirming that Eurozone economic growth recently hit a brick wall and has been in freefall (largely due to the collapsing Chinese credit impulse)…
… is sufficient to explain why most traders were expecting a more dovish Draghi to emerge from today’s press conference. Instead, Draghi once again surprised with his bubbly optimism, downplaying the clearly soft economic data.
Specifically, the ECB president said that he expects economic growth to remain solid, and underscored the hawkish case by stating that he expects “solid, broad-based growth.” In a follow up question, Draghi attributed some of the recent slowdown in economic data to “one-off” factors, which would read as fairly positive for the outlook. Specifically, he blamed the weather, and – once again – the timing of Easter: “Some normalisation was expected, mostly due to temporary factors, for example cold weather, strikes, timing of Easter”.
He also cited continued strength in data flow on an absolute basis – he summarizes with the line “caution, tempered by unchanged confidence.”
Having touched on FX volatility in recent press conference, Draghi was also asked a question about recent FX moves, although he swerved away from an outright comment on EUR, saying the ECB did not discuss exchange rate volatility and does not comment on recent EUR weakness despite given an opportunity.
Commenting on the presser, ING said that Draghi’s optimism may encourage Euro bulls, and adding that Draghi “not expressing too much concern over recent softening” in economic data has helped the euro and may encourage investors who are bullish on the currency: “EUR passes its first test on Draghi’s comments” according to ING analyst Viraj Patel.
According to ING, the message is that euro-zone growth outlook “remains solid and broad-based could excite some lingering EUR bulls” Patel said, and added that “reading between the lines, one could see these are levels that the ECB are comfortable with.”
He concluded that lower EUR/USD levels will be seen by bulls as “an attractive entry point to go long again ahead of the June” ECB meeting, although notes that hard economic data will determine conviction.
Sure enough, in response to the ECB’s lack of concerns about the economy and FX volatility, the EUR jumped, rising above 1.22.