Draghi Defends QE’s importance

Discussion and Analysis by Charles Porter: 

Purchasing Managers’ Index (PMI) performance results spur further intraday Euro gains against the Dollar and Pound Sterling.


IHS Markit announced their Eurozone PMI results this earlier, conjuring an optimistic image of a strong Eurozone economy. The PMI indicator is curated through detailed survey-data extracted from pivotal business figures. An opinion-based structure makes the indicator a highly dynamic source to forebode private sector trends. The holistic index frequently comoves with GDP growth allowing a more responsive market impression to be drawn.


This Euro’s movements this morning are depicted below this article. A bullish Euro was caused by better-than-anticipated PMI results and reinforced by a European Central Bank (ECB) speech. PMI Manufacturing results were anticipated to fall from 56.6 index points in July. Instead, the manufacturing survey-responses led to a hike of 0.8 index points; a non-negligible rise. Whilst the Services PMI results were disappointing, showing an unanticipated decline, the Composite index exceeded its anticipated revaluation. Therefore, an optimistic outlook for the Eurozone economy has been praised today by analysts, investors and the media.


This month’s PMI results are released during a period when the Euro stands at an eight-year high versus Sterling, following an outstanding August performance. Following PMI results, the president of the ECB, Mario Draghi, offered an optimistic and complementary, though ultimately uninformative, speech. Draghi praised how the ECB has wielded monetary policy and pursued Quantitative Easing (QE). QE is a mechanism for macroeconomic stimulation which targets both growth and inflation. Specifically, within the Eurozone, QE manifested as cautious secondary market asset and bond purchases to manipulate asset yields. Reframing the economic paradigm through which we assess the efficacy of QE, Draghi boasted “the success of these policies”.


The effect on currency markets is therefore unsurprising; stability and the validation of a macroeconomic tool by a constrained and supranational central bank amidst optimistic industrial data is highly attractive. Moreover, the endorsement of QE awards positive coverage to a Eurozone instrument that has been embroiled in legal challenges within German courts and the Court of Justice of the European Union since 2012.


The plummet in bond yields, following the climax of the Eurozone sovereign debt crisis, was cased by Draghi’s previous ‘whatever it takes’ speech. The instrument ultimately materialising from this declaration was outright monetary transactions, and, to some extent, QE. Therefore QE receives credibility through the ECB’s consistent support for the controversial macroeconomic tool. Amidst Sterling’s troubles and the UK’s political-economic roller-coaster, a further strengthening of the European economy could exacerbate and fulfil analysts’ pessimistic Sterling-Euro commentaries.





EUR/USD intraday exchange rate. 23/08/2017

Above: EUR/USD intraday exchange rate. Strong revaluations following the PMI data release and Mario Draghi’s speech. Following the production of this graph, the curtailing of the Euro’s gains vis-à-vis the dollar have reversed, leading to a further strengthening of the Euro against the Dollar.



GBP/EUR intraday exchange rate. 23/08/2017

Above: GBP/EUR intraday exchange rate. The depreciation of the Pound Sterling against the Euro (or strengthening of the Euro) occurs simultaneously with the dollar movements above, affirming the analysis citing the Euro as the independent variable for change. The time-sensitive inversion between the two graphs demonstrates the significance of the Euro’s rally. Namely, again, the reinforcement of PMI data through confident and consistent ECB rhetoric.