Yesterday’s ECB meeting went mostly as expected: There were no changes in policy. The Euro barely moved, as all eyes were on the press conference headed by Chief Christine Lagarde. The question was, what tone would she provide for the markets?
The consensus was that the ECB would double down on its pessimism, and stoke speculation of further easing. Many analysts had a negative bias going into the press conference. These were based on Chief Economist Haldane’s comments last week expressing concern over the strength of the Euro.
The market reacted just a few minutes into the press conference as Lagarde read a prepared statement. She struck an unexpectedly optimistic tone, saying that data suggested a strong rebound. But that’s not where the big move in the markets came.
In parallel, there was an ECB source press report that the members said there is no need to “overreact” to the Euro gains. This contradicted the statement made by Haldane. It prompted the shared currency to gain over 40 pips in a matter of seconds.
Clarification and Adjusted Projections
Almost as if to explain the press report that was circulating at the same time, Lagarde said that the bank will monitor the currency’s impact on inflation.
Some analysts had hinted that maybe the market wasn’t interpreting Haldane’s remarks in proper context: that it’s a well-known phenomenon that pass-through of inflation happens if the currency gets stronger, but that doesn’t mean it’s a problem right now.
Lagarde appeared to affirm this position. She suggested that the ECB is looking at forex moves, but they aren’t affecting policy yet.
It was at this point that the gain in the Euro tapered off, as the prepared remarks appeared to be virtually the same as what was said following the last meeting. Additionally, the ECB released its staff projections. There were some adjustments, but the end result left the expectations of policy the same.
The ECB raised their GDP forecasts this year from -8.7% to -8.0%, but cut next year’s to 5.0% from 5.2%. They marginally raised their inflation projections for next year from 0.6% to 1.0%, but maintained their 2022 projections at 1.3%. Since the latter is what shapes policy expectations, that it was unchanged implies that policy projections were likely not altered.
The Big Takeaway
What everyone was expectant about were the potential comments about the exchange rate. As expected, it was the first question asked by reporters. Lagarde repeated the line that the ECB does not have an exchange rate target, but that the issue was discussed.
Overall, the market appears to have overreacted to Haldane’s initial comments. This suggests that the EURUSD could make another run at the 1.2000 handle.