The European Central Bank (ECB) delivers a slightly dovish statement, but the common currency keeps trading in a tight range. The Governing Council did not have unanimity in its decision to keep monetary policy accommodative.
The ECB monetary policy decision was the main event of the trading week. Released yesterday, it revealed a slightly dovish stance, but it did not impact the common currency’s volatility.
The chatter in the market prior to the decision suggested that the ECB has some difficulties agreeing on the draft statement. As pointed out yesterday, the Governing Council did not reach unanimity on its decision to maintain the easy policy measures.
Dissenters are likely from the core countries (i.e., Germany), where inflation is higher than in the periphery. There are large differences across regions, with inflation forecasted higher than 1.5% in core countries and close to 0% in the peripheral ones in the second half of the year.
What Did the Market Expect?
Yesterday’s decision was the first one after the central bank presented the outcome of its strategy review. It did not change its mandate regarding inflation, but it shifted away from the definition of price stability.
Initially, the ECB defined price stability as bringing inflation below, but close to 2%. However, the new definition allows inflation to overshoot the target temporarily. Therefore, the focus of yesterday’s meeting was on the forward guidance and how the transition to the new format will take place.
As it turned out, the ECB changed its forward guidance slightly. It put more emphasis on inflation overshooting, cutting the chances of any tapering announcement in September.
Still, the more dovish stance did not affect the common currency. For example, the EUR/USD pair, as seen in the chart above, traded in a tight range the entire week, moving between 1.18 and 1.1750.
Perhaps, it is because the market dropped in anticipation of the event. Or, maybe the ECB’s guidance prior to the meeting was clear enough for everyone to understand the central bank’s intentions. Some may even argue it is just slow summer trading.