ECB Confuses Markets As Lagarde Optimistic On Economy, Not Cautious On Euro

ECB Confuses Markets As Lagarde Optimistic On Economy, Not Cautious On Euro  | Sep 14, 2020 17:39

Christine Lagarde spent eight years as a cheerleader for the global economy when she headed the International Monetary Fund. Apparently that's a hard habit to break.

All those analysts and market participants who expected the head of the European Central Bank to coo and whimper about the strength of the euro and make noises to dampen its rise were disappointed on Thursday when Lagarde instead talked up the European economy, propelling the euro higher.

EUR/USD 60 Minute Chart

Other members of the ECB governing council scrambled to soften that stance on Friday.

Chief economist Philip Lane, executive board member Isabel Schnabel, and French central bank governor François Villeroy de Galhau all emphasized that policymakers were indeed worried about the impact of a strong euro and would do nothing to choke off a recovery by tightening monetary policy.

Less Attuned To Market Cues

Whereas Lagarde had taken an optimistic view about a strongly rebounding economy and suggested only that the central bank was keeping an eye on the exchange rate, Lane and Villeroy de Galhau both cautioned that a strong euro could harm the economy.

Lane, the former head of the Central Bank of Ireland, said the absence of inflation poses a risk and leaves no room for complacency. He suggested that data in the coming months could make the ECB adjust its policy and fueled speculation that the bank would indeed expand its €1.35 trillion emergency asset purchase program.

The shift by the US Federal Reserve to abandon preemptive rate hikes and to push for inflation in excess of the 2% threshold weighed on the dollar, putting upward pressure on the euro as the US seemed set to keep interest rates low for some time. Market participants were looking for reassurance that the ECB was at least cognizant of the dangers this posed and would reaffirm its accommodative stance.

It’s always hard to know, when the head of the ECB speaks, to what extent it reflects a balance of opinion in the governing council. That was as true for Lagarde’s predecessor, Mario Draghi, as it is for her. What’s different under Lagarde is that she seems to miss the cues from the market as to what they expect to hear.

Some other council members reportedly were also on board with the benign view expressed by Lagarde, and are not really worried about a euro worth $1.20. The joint currency settled at a notch about $1.18 on Friday, not too different from its level before the meeting, after spiking above $1.19.

But that's still an 8% gain from its level at the onset of the coronavirus pandemic in March. Investors had been expecting enough concern from the ECB that the rate could drift downward.

Inflation in the eurozone slipped into minus in August, hitting a minus 0.2% compared to an increase of 0.4% in July. But Lagarde said the central bank expects inflation to increase to 1% next year from an average 0.3% this year, raising its forecast for 2021 from 0.8% previously.

This, too, countered market expectations. The August reading suggested a slower pace for inflation, a trend further exacerbated by the strength of the euro, which would dampen price increases on imports while making exports more expensive.

Rightly or wrongly, investors took Lagarde’s optimism about the economy and its wait-and-see attitude on accommodation as relatively hawkish for monetary policy, instead of the dovish stance they had expected. Some economists now expect the euro to head for $1.20 and to test that threshold.

On top of that, a resurgence in COVID-19 infections has paused the reopening of the economy in several EU countries or led to new shutdowns, crippling the expected rebound in tourism and slowing economic recovery in general.

This makes the ECB inflation forecast seem high, but even that level of 1% is too low to indicate a robust recovery, suggesting that more monetary stimulus will be needed, either in a further decline of benchmark interest rates or an expansion of asset purchases.

But this is not the message Lagarde was sending. Instead, it was hip-hip-hooray for a stronger-than-expected rebound, enabling the eurozone to trim its forecast for retraction this year to 8% from 8.7%. It may be this type of forward guidance will backfire.

Related Articles

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (UK) English (India) English (Canada) English (South Africa) English (Philippines) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
Saving Changes


Download the App

Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors. is better on the App!

More content, faster quotes and charts, and a smoother experience is available only on the App.