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Christine Lagarde
Daniel Roland/Agence France-Presse/Getty Images
Euro bulls were rejuvenated Thursday, after the European Central Bank failed to offer any meaningful reason to brake the shared currency’s rise.
The ECB Governing Council, as expected, left rates and its massive asset-buying programs unchanged, leaving President Christine Lagarde’s news conference as the main event, but a relatively upbeat outlook on the economy and inflation left Lagarde with little in the way of meaningful weaponry to arrest the euro’s clearly unwelcome appreciation.
The euro EURUSD, +0.64% remained 0.6% higher at $1.1882 after trading as high as $1.1917.
“The ECB presented almost no serious hurdles to renewed euro strength as economic forecasts were more upbeat than expected while comments on the exchange rate were fairly soft ,” said Petr Krpata, chief EMEA FX and interest-rate strategist at ING.
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Lagarde said the rising euro was “extensively” discussed during the meeting, but emphasized that the ECB doesn’t “target” the exchange rate.
She emphasized, as ECB officials often do, that the exchange rate is important largely because of its influence on inflation. A stronger euro puts downward pressure on prices, an unwelcome development with inflation having long run well below the ECB’s target of near but just below 2%.
The euro’s gains were boosted as the news conference got under way after Bloomberg reported that the Governing Council had agreed to not overreact to euro gains. Anticipation of a stronger pushback against the euro’s rise had built after ECB chief economist Philip Lane last week said that the exchange rate “does matter” to monetary policy, remarks that took the wind out of a rally that had seen the euro top $1.20 for the first time in more than two years.
Updated staff projections, meanwhile, offered additional fuel for euro bulls, reflecting increases in the forecast for core consumer price inflation in 2021 and 2022, noted Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.
Expectations for further monetary easing weren’t enhanced either after Lagarde said there was no discussion of boosting the size of the 1.35 trillion euro ($1.6 trillion) pandemic emergency purchase program, or PEPP, at Thursday’s meeting.
That just underscores the limited options available to the ECB when it comes to fighting an appreciating euro, particularly when expectations are building for a long-term downtrend by the U.S. dollar.
“Even if the ECB deemed it necessary to credibly lean against the recent currency strength, apart from the possible verbal interventions (which eventually must be followed by real action for them to be credible), it is important to note that the current accommodative ECB policy stance is already rather stretched,” Krpata said.
So now what? ECB officials may try to jawbone the currency in the near term, but the euro is likely to continue its rally, “trying to test where the pain threshold really is,” Vistesen said. “As far as the central bank’s stimulus programs are concerned, we now have to assume that they’re on hold, at least unless the data shift dramatically, to the downside. ”
