The ECB will almost certainly keep the monetary policy unchanged later today. However, the following press-conference may prove to be key for the fate of the euro.
The European currency has strengthened considerably in recent months, rising to 1.2000 at the beginning of September, while at the end of March the pair dropped briefly to 1.0635. Usually, central banks in developed countries avoid commenting on currency movements. However, this time ECB Chief Economist Lane noted that the exchange rate “does matter” for monetary policy.
In the language of central bankers, this was an apparent dissatisfaction with the rising rate and an attempt to stop it.
The rising euro rate could put severe pressure on consumer inflation in the region. In addition to inflation, the growth of the single currency undermines the competitiveness of European exports at a time when it remains one of the few drivers of economic recovery, thus forcing the central bank to resort to bolder or longer monetary policy easing.
The ECB will also be asked to comment on recent changes in the Fed’s strategy. The responses may uncover some details about the impending European revision of its policy.
Suppose the ECB follows in the footsteps of the Fed. In that case, this promises to have a moderate negative impact on the euro in the medium term. At the same time, it is almost inevitable that other global CBs may take this approach, focusing on economic growth and maintaining employment rather than inflation.
In turn, EURUSD may well continue its corrective rollback, risking depriving the bull support that bought back the pair in the 1.1750 area. A failure below this level could lead the way to 1.1640 or even 1.1500 in the next month or two.
It may well turn out that the ECB will remain focused on inflation, leaving growth, employment and public debt on the government’s shoulders. This will be a strong bullish signal. In this case, EURUSD may not only test 1.2000 again soon, but it will also be close to 1.2500 by the end of the year.
Our expectations suggest that the currency market will fluctuate very strongly in the coming months. However, it is worth remembering that 2020 is a year of high uncertainty and accompanying large movements. Dynamics may become more sluggish in the coming years but will still maintain the momentum gained this year.
