Are policy changes in store for the eurozone?

This week has certainly been turbulent for the euro. The single currency began the week by shedding some of its recent gains against the dollar and kept going as investors were preparing for this week’s big announcement: the minutes from the European Central Bank’s meeting from January 24. These kinds of reports have recently become an absolute must-read for many analysts who eagerly search for clues as to the ECB is ready to turn to a more hawkish policy. So, did they get them?

Well, not really. The ECB led by its president Mario Draghi has been steadily upholding its massive stimulus measures put in place after the financial crisis: their view for the European economy has been to promote inflation in order to foster a healthier economic climate. Despite overwhelmingly positive data over the last two to three years, the ECB has insisted that this plan is still necessary and Draghi has stated multiple times that the stimulus will remain for as long as it is needed, as exiting the stimulus program too early could harm the economy. Yet, regardless of these statements investors kept betting on an early exit, perhaps even in 2018, and these expectations pushed the euro up.

Seeing that many traders continue to believe in an upcoming rate increase, despite all assurances to the contrary by Draghi, it seems that this time the ECB tried a firmer tone in their minutes, stressing that the dovish measures might stay in place will into 2020, as it is not projected that their inflation target will be reached before then.

The report shows that the ECB plans to maintain a steady course and only make adjustments to its monetary policy if it is sorely needed. In a way, this is a correction of what was published in the December minutes which suggested that the ECB might be preparing for an early exit, though it turns out that was just careful planning, more than an actual change in attitudes.

Right after the report was published, the euro experience some volatility and rose by 0.3% to $1.2308, but the increase didn’t last. In fact, a slightly weaker euro is not unwelcome to the ECB. Some economists have suggested that the euro’s recent moments of strength were due to the expectation of a hawkish monetary policy, causing a speculation-induced volatility. Instead, the ECB has spoken against this, insisting that a stable euro is better, and a cheaper one is even good for exports.

Inflation, according to the ECB, is not supposed to approach the coveted level of 2% until 2020 at the earliest, but promising statistics may open the conversation about the end of the stimulus measures – which would have to happen at some point in time. Still, it is clear from the minutes that it did not occur during the ECB’s January meeting.

So what we learned about the January meeting of the European Central bank boils down to the following: they are not planning on a rate increase for the foreseeable future, but they are open to a conversation about it during their future meetings, as long as the economic data for the eurozone keeps coming in strong. Would this push traders to strengthen the euro further or help the single currency settle? We’d have to wait and see.