The Federal Reserve and the art of navigating a soft landing ... when economic data sends mixed signals 
Why central banks are too powerful and have created our inflation crisis 
Governments have been able to overrule the Reserve Bank for 80 years. Why stop now? 
Draghi had a very dovish tone today and surprisingly opened the door for a deposit rate cut. Based on this, economists now expect the ECB to cut the deposit rate by 10bp at the meeting in December, to keep the door open for further rate cuts and at the same time announce an extension of the QE purchases beyond September 2016.
"Our changed expectation regarding the deposit rate reflects the fact that the ECB discussed a deposit rate cut today whereas Draghi has previously argued that the ECB had reached the lower bound on interest rates after making a 'technical adjustment' in September last year", says Danske Bank.
According to Draghi, a deposit cut is one of the instruments the ECB will assess ahead of the meeting in December where it will release new growth and inflation projections. Related to this, Draghi described today's meeting as a meeting for 'work and assess' - not a 'wait and see' meeting.
Another argument for the ECB cutting the deposit rate is that Draghi's main focus today was on 1) the appreciation of the euro and 2) higher real rates and hence inflation expectations. An extension of the QE purchases is already consensus and thus it will have limited impact on both the exchange rate and on inflation expectations. On the other hand, cutting the deposit rate further would have a stronger market impact, which also follows as we expect Draghi to signal that the ECB has not necessarily reached the lower bound on interest rate, but it depends on incoming information.
The ECB's change of view on a deposit rate cut should be seen in the light of other central banks' experiences of negative rates. Both Danmarks Nationalbank and the Swiss Central Bank have now had a period of around six months with a certificates of deposit rate and a sight deposit rate, respectively, at -0.75%.
From a market perspective the dovish stance from Draghi resulted in a broad-based rally in the EUR govie market. In the core it was initially driven by the short-end with the Schatz yield going below -32bp - a new all time low. Draghi opened the door for a possible depo cut with the EONIA market now pricing in around 9bp in additional cuts over the next year. After the market had digested the message the rest of the curve dropped symmetrically. By contrast, the rally in the periphery was driven by the long-end. 10Y Italy dropped 11bp and the spread to Germany has dropped below 100bp - the tightest since March this year.
"The euro declined substantially today on the surprisingly soft stance by the ECB. Given that we now project a 10bp deposit rate cut in December, we revise down our 1M and 3M EUR/USD forecast from 1.12 to 1.10 and 1.08 respectively, as a further deposit rate cut - on the margin - is more EUR-negative compared to our previous call of an extension of the QE programme. However, we maintain our view that EUR/USD is likely to see diminishing losses on relative rates as the sensitivity of EUR/USD to this has declined. Moreover, the experience from H1, when EUR/USD bottomed out just a few months after the QE announcement in January, implies that additional easing and thus EUR/USD downside is likely to unfold in the coming months. Hence, we think the low in EUR/USD will arrive in 1-3M and still look for a move higher in the cross towards 1.12 and 1.20 in 6M and 12M, respectively, as warranted by medium- to long-term fundamentals", added Danske Bank.
