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European Central Bank (ECB) President poses for a picture during a ceremony at the Academy of Athens, Greece, 01 October 2019. (ddp)

Eurozone Hawks could enjoy more sway as Draghi bows out

25 October 2019, 09:01 am CEST, written by UBS Editorial Team

As Mario Draghi prepares for his exit, it remains to be seen whether his dovish course will continue under , and reduction in monetary support would have important implications for investors.

Mario Draghi gave his last press conference as president But it remains to be seen whether Draghi's dovish course of (ECB) warning that Eurozone will continue under his successor Christine Lagarde, and economic momentum was slowing. His tenure, which ends any reduction in monetary support would have important on the last day of this month, was marked by the use implications for investors. of unorthodox monetary policy to support the economy and markets, including a EUR 2.6 trillion bond purchase While Lagarde's statements suggest she is just as dovish program and the reduction of policy rates into negative as Draghi, saying in August that ECB policymakers must territory. Draghi doubled down on this approach six weeks be ready to act to protect the economy, she is also ago by announcing a resumption of bond purchases and considered a consensus builder. That tendency could give a rate cut to –0.5%. While Draghi leaves his post with greater influence to move hawkish ECB policymakers. inflation less than half the ECB's 2% target, his market French central bank president Francois Villeroy said late last scorecard has been largely positive. month that he was "not in favor of the resumption of net asset purchases at this time," considering it "unnecessary." Since he took over on 1 November 2011, he can claim a Dutch central bank chief Klass Knot said the recent policy leading role in helping calm concerns over sovereign debt moves were "disproportionate" and called into question on Europe's periphery, with the 10-year Italian government the effectiveness of the policies, while Austrian central bank bond yield down from 6.2% to today's 0.9%. Average governor Robert Holzmann hinted that Draghi had made returns on the Stoxx 50 have been 10.2%, versus a mistake. Finally, Bundesbank's Jens Weidmann suggested 2.9% under predecessor Jean-Claude Trichet (2003–2011) that Draghi had "overstepped the mark" at a time when and –3.2% under Wim Duisenberg (1998–2003). the "economic situation is not all that bad." With plenty of

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ECB policymakers skeptical of Draghi's approach, it could take Lagarde a year or more to gain traction.

There has also been some sign of questioning of the dovish approach on the Eurozone's doorstep, with Sweden's Riksbank saying it planned to put an end to negative rates despite continued signs of economic weakness. Governor Stefan Ingves said that although negative rates had helped cope with the aftermath of the financial crisis, he warned that risks would increase if the policy became entrenched and that many people considered the policy "strange." The Riksbank has said it sees the repo rate returning to zero by the end of the year, from –0.25% at present.

So, we believe the course for monetary policy is far from certain as the Draghi era draws to a close. Even a modest shift away from dovishness would increase our confidence in our positive outlook for EURUSD, which we expect to rally to 1.17 by the third quarter of 2020. A moderating degree of dovishness would also represent a setback for Eurozone peripheral sovereign bonds and high yield corporate credit.

Authors: Mark Haefele, Ricardo Garcia, Jon Gordon

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