Forex Flash: Normalization in Eurozone is EUR positive – UBS

According to the UBS Analyst Team, “We remain of the view that at least in the short-term any further normalization in the Eurozone is euro positive. Draghi skillfully corrected in his February press conference what many saw as a communication mistake back in January when there was an impression of the ECB having become more hawkish.”

Clearly, the ECB is firmly neutral at the moment. Nevertheless, the ECB balance sheet has shrunk substantially as banks have repaid LTRO cash, which stands in stark contrast to other major central banks. The rise in rates has been partially reversed since, with ECB officials pointing out that liquidity will remain plentiful, but the fact is that the ECB is not fully in control here as banks are obviously free to take their own decisions.

Moreover, the recent market hype about Draghi mentioning the exchange rate in his February press conference may have been overdone. “A stronger exchange rate is obviously growth-negative, but in terms of inflation the impact might well have been compensated by higher energy prices. We believe the inflation outlook will remain 'broadly balanced' and that the ECB will thus take no further accommodative action.” they add.