• ECB FX concerns: This was supposed to be a “wait and see” meeting, but developments in the FX market, and the generalized USD weakness, led the ECB to express its concerns on the FX volatility. Draghi condemned possible currency manipulation as being in breach of international commitments, and highlighted that volatility in the exchange rate is a source of risks and it is certainly globally negative.
• Market reaction: Markets reacted to the press conference initially by buying EUR, especially on the back of Draghi mentioning that “data confirm robust pace of economic growth”, that this strong “momentum boosts confidence in inflation pick-up”.EUR/USD is on a very strong upward momentum and it seems very likely that it could continue to trade firmly in the 1.25-1.30 range. We expect that the communication around currencies will remain very fluid in the coming weeks.
• Fixed income investing: The main risk in the market lies in this misleading inertia, inducing belief that the action of Central Banks really has anesthetized the markets. As inflation perception will probably be the main reason for the European Central Bank to change the path of normalization, opportunities will arise from Inflation Linked Bonds and duration play. Without major surprises, opportunities will stay with premium assets, peripherals, credit (from IG to HY) or convertibles bonds.
