Euro strength is a source of weakness

It didn't happen overnight, but it did happen.

European Central Bank president Mario Draghi's concern over the impact of the euro currency's appreciation, that is. Recall that the ECB had been conspicuous in its silence about the euro since its 20 July meeting, and in that time, Draghi only made a passing reference to it by commenting that "the repricing of the exchange rate has received some attention."

While the ECB kept monetary policy unchanged following last night's meeting, it did mention the euro in its monetary policy statement: "Compared with the June 2017 Eurosystem staff macroeconomic projections, the outlook for headline HICP inflation has been revised down slightly, mainly reflecting the recent appreciation of the euro exchange rate."

And in the Q&A, when asked if Draghi thinks the euro is a problem at its current level (the euro is up 14.3% versus the greenback this year to date): "...the exchange rate is not a policy target. It's very important for growth and inflation. It's so important that the medium-term outlook for inflation was revised downward in the staff projections mainly due to the appreciation of the exchange rate, which means that we will have to take into account this element in our information set in our future policy decisions. In the last monetary policy meeting there were concerns expressed by a few. These concerns were now reiterated by most members at this meeting. Of course one issue that was discussed was how much of this appreciation is due to completely exogenous factors, how much is simply the natural outcome of the improved economic conditions in the euro area? And opinions diverge."

"But there was by and large broad consensus on the fact, as I just read in the introductory statement, that the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability."

However, the ECB does not expect the euro's appreciation to have an impact on growth, at least for this year. It lifted its 2017 GDP growth projections to 2.2% this year (from 1.9% in June).

The ECB raised its GDP forecast for 2017 to 2.2%, the fastest rate since 2007, compared with 1.9% seen in June before slowing to 1.8% in 2018 and 1.7% in 2019.

More important, its inflation projections were kept unchanged at 1.5% this year but was lowered to 1.2% (from 1.3%) next year and 1.5% (from 1.6%) in 2019, not least, because of the euro currency's strength.

But despite the euro's strength, Draghi still mentioned that discussions on QE tapering are likely to start this autumn. It has no other choice for the programme is set to run only until the end of December this year.

But while financial markets widely a schedule (at the very least) of a QE unwind, note that the ECB's missive is that €60 billion monthly asset purchases "are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim."

Emphasis on "or beyond" and the references to "inflation" - the key variable that the euro's strength had been exerting downward pressure on.

Read more: ECBGDPQ&AQEEuropean President Mario DraghiEurosystemGoverning Council
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