Mario Draghi showed growing enthusiasm about the state of the euro-area economy, while cautioning that inflationary pressures remain too weak to contemplate paring back stimulus.
“It’s true that growth is improving, things are going better,” the European Central Bank president told reporters in Frankfurt on Thursday after the Governing Council agreed to keep its stimulus settings unchanged. “In 2016 we were speaking of a fragile and uneven recovery. Now it’s solid and broad.”

Euro-area economic data have demonstrated increasing resilience in recent months, prompting ECB officials to publicly debate when they might start to wind down asset purchases and raise interest rates. Draghi’s reticence to touch on that discussion reflects concern that core consumer prices are too weak and would fade without continued monetary support.

“The risks surrounding the euro-area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside,” he said. “Underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend.”

Economists predict the first hints of an exit from extraordinary stimulus may come by June 8, when the Governing Council next announces policy and publishes projections on the economic outlook.

Speaking shortly after the European Commission’s economic confidence index showed the highest reading since August 2007, the ECB president acknowledged that the region’s recovery is becoming “increasingly solid.” Data next week is expected to show the economy grew 0.4 percent in the three months through March, and indicators in the past month suggest further strengthening.

Eoin Treacy's view

The ECB has taken on lot more responsibilities but its core mandate is to achieve an inflation rate close but not more than 2%. The ECB’s favoured inflation rate, the Eurozone 5yr in 5yr Forwards rate hit a medium-term low near 1.25% last year and since rebounded. It is now testing the 1.6% region which coincides with the trend mean and a sustained move below that level would be required to question potential for additional upside. 

The big question is the extent to which energy prices played a role in the run up last year and what effect the loss of upside momentum will have on inflationary expectations going forward. It seems to me at least that describing a 0.4% growth rate as robust is a reflection of just how modest expectations within the Eurozone are with almost a decade and counting of austerity. 

The Euro has failed to hold moves above $1.08 since November so short-term traders will likely be keeping a close eye on that level. However within what is still a choppy environment the broader question is how well the progression of higher reaction lows, currently near $1.06, holds during any possible weakness ahead of a potential narrowing of polls ahead of the French election run-off. 

Ahead of the election it was my contention that the best possible scenario for LePen would have been a narrow failure to win the first round which would embolden her supporters to get the vote out and lend a sense of complacency to the opposition. With that scenario now playing out, the question of voter turnout is likely to heavily influence the result of this race with the potential for additional volatility for the Euro.