Euro rally amid dovish ECB warning could signal overshoot
Despite Draghi’s caution on rising euro and pace of tapering, the currency shot up while Italian bond yields tanked
The euro’s rally today was all the more remarkable considering the dovish outcome of the ECB meeting. Mario Draghi warned that the rising euro could be a problem for European monetary policy, and indicated that tapering of the ECB’s $2 trillion bond buying program would occur more slowly than anticipated.
Italian bond yields (one of the biggest beneficiaries of the ECB’s quantitative easing) dropped by 11 basis points on the news, and the spread between German and Italian bond yields dropped by 6 basis points. The euro’s rise in face of determined dovishness suggests that the currency may overshoot, which would complicate life for Europe’s exporters.