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ECB’s Draghi seen walking cautious line at Jackson Hole after Sintra debacle, pushing euro higher

  • ECB President Mario Draghi expected to avoid talk of monetary policy pullback at Jackson Hole on Friday
  • Lack of specific comments likely to boost euro, says analyst

While Bundesbank President Jens Weidmann has called on the European Central Bank (ECB) to end its bond buying programme, ECB President Mario Draghi is unlikely to use language that could potentially excite markets in his Jackson Hole speech this Friday, having been scarred by his recent experience at another central banking conference in Portugal, say analysts.

Bond yields and the euro surged following Draghi's remark at the Portuguese resort of Sintra in late June that "all the signs now point to a strengthening and broadening recovery in the euro area." The president's ECB colleagues were subsequently compelled to spend several days qualifying and walking back his comments to calm nervous traders.

President Draghi will, therefore, be mindful of saying as little as possible given that market reaction, Simon Derrick, chief currency strategist at BNY Mellon, told CNBC's Squawk Box on Monday.

"He's going to say nothing at Jackson Hole," opined Derrick, adding that this strategy may not, however, be enough to help with the ECB's concerns over the euro's recent buoyancy.

"I think unfortunately that probably does feed into euro strength but I think the market has to be aware that they really don't want that. So if you start to see a euro that's moving towards 1.19 or 1.20 that's going to change expectations about what they do at the next meeting," he continued.

Further indications that Draghi will stick to the script on Friday can be found in perfectly transparent recent messaging from the region's central bankers, according to Peter Chatwell, head of euro rates strategy at Mizuho.

"The ECB has been quite clear that there will be no change in policy stance until the next meeting. This has been communicated by Draghi himself at the last meeting and also on the ECB's twitter feed," noted Chatwell via an email exchange with CNBC on Monday.

"Moreover, the ECB took the unusual step of stating that Draghi's speech on Friday will be on the topic of the Symposium 'Fostering a Dynamic Global Economy,' he added, highlighting the central bank's board ambition to shift the focus on the president's speech to a broader agenda than the potential timeline for adjustments to regional monetary policy.

Michele Tantussi | Getty Images | Getty Images News

Expectations that the ECB president may deliver market-moving news this week is partially due to widespread anticipation of an upcoming reduction in monetary policy support given the strengthening indications of a regional economic recovery over the course of this year.

Jens Weidmann, president of the Bundesbank, said on Wednesday the 2.3 trillion euro bond-buying program should be quickly concluded next year because the economic outlook was improving.

Speaking earlier at a conference in Lindau, Germany, Draghi praised economists' research and said that adjustments to monetary policy are "never easy." However, he made no reference to how the bank might adjust its own policy to the improving economic data across the euro zone, a highly debated issue among market participants.

Expectations have also been raised on the back of precedents set by Draghi, who has historically used the conference as a forum for delivering critical messages, such as in 2014, when he laid the groundwork for the bank's bond-buying scheme.

The ECB elected to extend its quantitative easing program last December after a continuation of a disappointing run of European inflation data, however, as tentative signs of reflationary pressures begin to stir, the timeline for the central bank to pull back from its extremely loose monetary policy has come ever more sharply into focus.

The euro has strengthened by just shy of 12 percent against the U.S. dollar so far this year, with BNY Mellon's Derrick attributing the strength to what he believes are now overegged expectations of near-term policy tapering.

"If you've listened very carefully to what has been said by Mr. Draghi and what is being said in the statements, it's actually been a very cautious set of statements of late. Moreover, they have made it quite clear that they're concerned about euro strength," the currency strategist observed.

"So I would say if anything, were any rhetoric at all to come out of the ECB over the next month or so, it would be more about playing down expectations of tapering," he predicted.

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