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Hawkish ECB Meeting Outcome Sends the Euro Higher


Posted: Friday, September 11th, 2020

Estimated Reading Time: 3 minutes

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Yesterday’s ECB meeting rose to expectations. For more than two weeks, currency traders waited for the ECB’s first meeting after the summer holidays.

The pressure mounted for the ECB to act. As core inflation dropped to record lows in the Euro area, many traders waited for the ECB to come to the rescue.

The sentiment was fueled by the verbal intervention delivered by the ECB’s Chief Economist, Phillip Lane. A couple of weeks ago, the EURUSD rate reached 1.20. At that point, Lane stated that the ECB does not target the exchange rate, but the EURUSD rate matters. Just like that, the EURUSD dropped a couple of hundred pips.

But instead of delivering a dovish message, the ECB did just the opposite. Even if it was by mistake, as it looks like, the hesitation and the unclear message show an amateurish ECB. This would never happen during Mario Draghi’s term.

ECB Meeting

Communication Failures at the September 2020 ECB Meeting

Right from the start, the ECB’s communique emphasized the robust bounce in the economic activity in the last six weeks. While true, it should not have come at the start of the press conference.

After all, the main message the ECB tried to deliver yesterday (and failed), was that it stands ready to ease more. Also, to make it clear that the ECB cannot remain complacent while inflation threatens to break below zero.

Instead, Christine Lagarde stated that core inflation is in line with ECB’s staff projections. Moreover, the ECB increased its inflation projections for the next two years. Hawkish as hawkish can be!

Throughout the press conference, President Lagarde showed hesitation – in tone, in reactions, in the ability to deliver a clear message.

She did emphasize, though, the fact that the PEPP program has no ceiling. Or that the ECB stands ready to do more. But it was too little too late – and at bad timing. The Euro already rallied across the board.

The ECB also included the exchange rate into the ECB meeting statement. It is for the first time in a while when it does so – something ECB watchers will watch closely, as the G10 agreement asks central banks to refrain from mentioning the exchange rate. If the ECB did it, it means it was pressured by lower inflation expectations as a stronger currency weighs on inflation.

Then why delivering a hawkish message?

Phillip Lane to Save the Day – Again

It seems that when Mario Draghi left, he took his entire team with him. Indeed, Vitor Constancio, the former ECB Vice-President, left the bank too.

The new Lagarde-De Guindos team better step-up to the challenge, or the market will have no mercy putting pressure on the ECB on the first chance it has. Luckily, a rising star appears on the horizon – none other than Phillip Lane.

Today, Lane, also an Executive Board member, published a blog post on the ECB’s website – a regular way to communicate with market participants, the press, or ECB watchers. Basically, the blog contains everything that the ECB was supposed to say yesterday.

But it did not.

It is not the first time when the ECB delivers the wrong message. During Trichet’s presidency (i.e., Mario Draghi’s predecessor), the ECB made history raising the interest rate in full financial crisis.

Just like yesterday, Trichet’s move spurred a higher EUR across the board, a move that lasted for months. Will yesterday’s ECB meeting outcome have the same impact on the common currency?

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