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ECB President Draghi is once again the king of curveballs. After delivering what was arguably a dovish statement early on in his press conference, and clearly stating that for the ECB’s GDP and inflation forecasts are conditional on the implementation “of all our policy measures”, Draghi displayed a more hawkish tone during the Q&A.

The key takeaway from this month’s ECB meeting appears contradictory: QE is here to stay in the Eurozone, until at least the end of this year. However, more policy action is less likely because deflation risks have receded. Reading between the lines suggests that the next change from the ECB will be towards removing accommodation and not adding it.

The two faces of Draghi

“Why didn’t the ECB just say that,” I hear you cry. Well, if Draghi had been that blatant, then volatility would have surged, something that the ECB likely wants to avoid. Instead, an opaque reference to the ECB’s slightly less dovish stance was needed to control the market reaction. Even though the EUR rose on the news, it is only up 60 pips so far, and likewise, German bond yields are only 3 basis points higher. Thus, Draghi managed to get his less dovish message across, but the market impact has, so far, been contained.

Are we in a post-policy era for central banks?

Ahead of this press conference I had suggested that central banks were in a post-inflation era; by this I meant that rather than prevent inflation, central bank policy is now happy to look through periods of rising prices if tighter policy threatens growth. However, in this press conference Draghi managed to sound concerned about inflation – Eurozone inflation expectations have risen sharply in the last three months to their highest level since 2015 – yet he was utterly unwilling to bring an early end to the ECB’s QE programme. Therefore, are we in a post-policy environment, where Draghi doesn’t have to change policy to get his less dovish message across?

The market reaction

The market reaction to Draghi’s comments has been fairly bullish, European stocks are a touch higher this afternoon, as are Eurozone bond yields. EUR/USD managed to ticked above 1.06 and EUR/JPY is at its highest level since early February, as Draghi started to talk. It is worth watching the euro’s close on Thursday to see if Draghi’s hawkish curveball will sustain euro gains, or if the euro starts to fade as the market re-focuses on the ECB’s commitment to fulfilling its full QE programme. We are definitely entering an interesting era for the major central banks.

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