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Five Years Ago Today...

Time flies when you are printing money.

As Citi's FX desk is kind enough to remind us, it was five years ago today that Donald Trump was a businessman and TV personality, and ECB President Mario Draghi vowed that:

“The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

He then compared the common currency to an insect:

“The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now -- and I think people ask “how come?”-- probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis.”

"Has Draghi succeeded?" Citi asks... "Where are we now?"

Looking at the chart below, it took two and a half years thereafter for EUR to fall back below that level but since then, we haven't seen the 1.20 level since January 2015.

It has been a slow and difficult (and at times highly uncertain) road, but it does seem to have been enough when it comes to growth. The Eurozone economies are gradually recovering, with Citi Economics recently revising higher its Q2 2017 GDP estimate to 0.7% QoQ. Hard data looks to be gradually catching up with strong sentiment signals. This is despite the recent strength in EUR and looming political uncertainties.

However inflation remains a crucial sticking point. Although deflation risks are over (for now), underlying inflation in Draghi’s words “remain overall at subdued levels”. Headline inflation has been supported by energy prices, although there has been recent weakness in the latter. Additionally the ECB continues to underpin the European bond markets, as noted by the FT here and as shown below:

And as Bloomberg points out, part of Draghi’s message behind his infamous bumblebee metaphor in July 2012 was that governments need to work closely together. A reoccurring theme from the ECB since then has been that monetary policy cannot be the only game in town. However structural reforms have been limited from governments, and changing political dynamics has not made this easier. And why bother making politically unpopular choices: after all, Draghi will do "whatever it takes"...

Still, after five years we are at least discussing the topic of tapering, and here's why. 

The recently subtle but relative hawkish shift from the ECB has given EUR further reason to strengthen as well as a plethora of dynamics contributing to USD weakness. But don’t hold your breath for Draghi & Co – the biggest takeaway from the ECB last week is that it is not in a rush, with no sign of urgency. Tapering is going to be at a positively glacial pace, with the first baby step taking place in the autumn (and even then, it’ll only be the announcement). Additionally, even when we do begin to reduce APP, there's no sign of a hike to follow...

As Citi concludes, "there’s plenty of food for thought here but one thing is for sure – the ECB will continue “to do whatever it takes” (for what exactly?), even if that means disappointing market expectations."