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Euro Surges in Wake of Draghi Comments on Inflation and Growth Sustainability

June 27, 2017 at 17:35 by Yahia Barakah

Euro banknotes rolled upThe euro surged against the US dollar and the British pound following comments from European Central Bank President Mario Draghi earlier today. Draghi’s remarks reflected a bullish assessment of the recovery in the European Union and revealed confidence in the road ahead for the monetary policy of the region.

Speaking at the European Central Bank Forum on Central Banking, which was held in Sintra, Portugal, Draghi said that monetary stimulus needs to be maintained until sustainable growth is reached. His remarks came as inflation remained more dormant than expected in the euro zone despite improved economic conditions. However, Draghi is confident that his bank’s monetary policy is moving in the right direction and its full effects on inflation will gradually materialize.

Monetary policy is working to build up reflationary pressures, but this process is being slowed by a combination of external price shocks, more slack in the labour market and a changing relationship between slack and inflation. The past period of low inflation is also perpetuating these dynamics.

Looking ahead, the European Central Bank should to be prudent when adjusting its policy as global uncertainties continue to present a level of risk to the economic recovery, according to Draghi. This requires the central bank to wait until economic factors appear solid enough to justify any policy adjustment, at which point the bank should have a gradual approach to any changes that are made to its policy stance.

We can be confident that our policy is working and its full effects on inflation will gradually materialize. But for that, our policy needs to be persistent, and we need to be prudent in how we adjust its parameters to improving economic conditions.

Pressures grew in recent months on the European Central Bank to begin tightening its policy as improving inflation figures increased confidence in the resilience of the economic recovery. However, Draghi reiterated in today’s speech the importance of strengthening and broadening the recovery in the euro area before recognizing that the inflation dynamics as solid enough to exit the stimulus program.

Although Draghi’s speech contained a cautionary tone when speaking about monetary policy in the near future, investors now believe that the ECB president is ready to give more ground to demands for reducing stimulus. Draghi is due to speak again tomorrow, which may bring in more signals on what the European Central Bank has in store.

The current week is light on major economic releases in the euro zone. There is however a new reading for the core consumer price index, which will be released by Eurostat on Friday. Analysts expect the reading to show that the index rose to 1.0% in June from a year earlier, following a reading of 0.9% in May.

EUR/USD traded at 1.1322 at 17:15 GMT on Tuesday from 1.1326 at 15:55 GMT, the pair’s highest level since August 2016. EUR/USD began the day at 1.1179. EUR/GBP was at 0.8850, after touching 0.8855 at 16:05 GMT, a level last seen in November 2016. EUR/GBP started trading today at 0.8788.

If you have any questions, comments, or opinions regarding the Euro, feel free to post them using the commentary form below.

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