Mario Draghi Faces New Inflation Challenges as ECB Prepares For QE Exit
Mario Draghi.

European Central Bank President Mario Draghi once again faces a series of events beyond the control his rate-setting colleagues as they meet Thursday in Frankfurt that are likely to delay any moves away from the Bank's bond buying program and record-low borrowing costs.

The ECB's controversial €2.55 trillion quantitative easing program, which continues to hover-up €30 billion in government, corporate and agency bonds each month, is due to expire in September, but with Eurozone inflation slowing for the third consecutive month in February, Italy's political deadlock holding back growth prospects in the region's third-largest economy and U.S. President Donald Trump threatening to launch a damaging trade war with Brussels, Drahgi may not be able to justify a major change in ECB language until at least two of those events are better understood by him and colleagues on the rate-setting Governing Council.

"We all know that Draghi will attempt to be as dovish as possible as the stronger euro, weak inflation numbers, the threat of Trump's trade tariffs, and Italian election all point to major challenges for the ECB in reaching its inflation goal," said Saxo Bank strategist John Hardy. "But could Draghi try to clear the dovish bar somehow, perhaps with an attempt to weaken the guidance that the ECB is on a "pre-committed" path as the September timeframe approaches for cessation of all asset purchases? The internal debate on the governing council must be getting rather heated at this point."

The euro was marked at 1.2377 against a weaker U.S. dollar by mid-day in Frankfurt, a session low, but has gained more than 3.67% against the greenback so far thsi year, partly amid speculation that the ECB is preparing to both end its QE program and potentially lift the -0.4% rate is charges to currency area lenders who use its deposit facility.

All eyes on the ECB's forward guidance. Expect more EUR/USD upside

— ING Economics (@ING_Economics) March 6, 2018

The Bank will publish fresh growth and inflation forecasts today, and while neither Italy's electoral gridlock nor Trump's trade war rhetoric are within the ECB's purview, the troubling pullback in Eurozone HICP could be significant enough to keep any hawkish signals from Draghi under wraps as he address the media later today.

Consumer price increases in the currency area slowed to 1.2% from 1.3% in January and 1.4% in December, Eurostat said, largely matching economists forecasts but once again coming in well-shy of the ECB's 'just below 2%' target for price stability. So-called core inflation, which strips out volatile prices for food and energy, was tabbed at 1%, again matching analysts' forecasts.

The reading also raises further questions as to how and when the ECB will co-ordinate the exit of its myriad policy tools, most of which have been in place for nearly three years, as the U.S. Federal Reserve hints at faster rate hikes between now and the end of the year. It also continues to puzzle economists as they watch the Eurozone economy accelerate and the region's jobless rate fall.

Earlier Wednesday, Germany's official statistics office said its January unemployment rate held at a record low 5.4% while its the number of jobless fell by a more-than-expected 22,000 to 2.393 million.

"Given the uncertainty surrounding the measurement of economic slack, the true amount may be larger than estimated, which could slow down the emergence of price pressures," Draghi told European lawmakers during his regular testimony to parliament last month. "Nonetheless, these factors should wane as the economic expansion continues and unemployment further declines. Looking ahead, we anticipate that headline inflation will resume its gradual upward adjustment, supported by our monetary policy measures."

That may take a bit longer than he -- or global investors -- anticipates.