Who needs the Fed? Draghi smacks down the euro

Mario Draghi hints at further stimulus
Mario Draghi hints at further stimulus

After a speech in London Wednesday that failed to excite investors, it was back to normal Thursday with the head of the European Central Bank (ECB) pushing down the euro with some dovish remarks at the European Parliament.

President Mario Draghi reiterated his words from the ECB's last meeting in October, saying the central bank would act by using all "instruments available" within its mandate to "ensure that an appropriate degree of monetary accommodation is maintained."

The euro dropped to a three-month low against sterling on his comments. The single currency also fell below 1.070 against the dollar at once stage during the speech, trading lower than where it reached during October's ECB press conference. It shortly regained some ground to trade at around 1.0710 versus the greenback. It had closed Wednesday's session at 1.0743.

Draghi stated Thursday that the ECB's asset purchase program is considered to be a particularly powerful and flexible instrument.

European Central Bank President Mario Draghi pauses while addressing an ECB news conference in Frankfurt January 22, 2015.
Kai Pfaffenbach | Reuters

"We have always said that our purchases would run beyond end-September 2016 in case we do not see a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates below, but close to, 2 percent over the medium term," he said.

"Other instruments could also be activated to strengthen the impact of the purchase program if necessary."

Ipek Ozkardeskaya, a market analyst at London Capital Group, stated that the "severely downbeat" speech from Draghi had stifled the euro.

"The possibility of deeper negative rates from December remains well alive. The market is already positioned deeply short on anticipation of a further unorthodox move from the ECB. Draghi's speech today has been a reminder, not a surprise," she said in a research note on Thursday morning.

At the ECB's last meeting, Draghi convincingly signposted the possibility of more quantitative easing (QE), sending the euro to a two-month low against the greenback.

At the October rate decision, Draghi spoke about the possibility of negative deposit rates and more asset purchases. It still remains unclear, however, whether the bank will extend its current 1 trillion euro ($1.1 trillion) asset purchase program beyond next September, or simply ramp it higher by increasing the monthly amount it buys.

Axel Weber, chairman of UBS, told CNBC Tuesday that he is expecting the central bank to cut its benchmark interest rate by another 10 basis points in December, but others aren't so sure.

Draghi makes case for a closer Europe

Adam Posen, president of the Peterson Institute for International Economics, told CNBC Tuesday, that the ECB wouldn't boost its monetary stimulus before the U.S. Federal Reserve hikes its own benchmark rate.

He said the Fed had already "done part of the job" for the ECB by lowering the euro-dollar exchange rate. Central bankers are reluctant to admit that the exchange rate is a key focus but the euro has been falling against the dollar in anticipation of a rate hike in the U.S. at the end of this year.

Consequently, this has provided a fillip for the euro zone's exporters and Posen believes this might just make the ECB wait until next year before implementing major decision.