As we forecasted on Thursday, the ECB’s press conference has driven EURUSD to retest recent lows with the pair even breaking through two-year lows to set fresh records during the afternoon European session. In an impressive show of metamorphosis, the President managed to change from dove to hawk, dove to hawk and back again in a decision and press conference that kept traders on their toes. Delivering her decision positive for covid and via video link, Lagarde ultimately sent the Euro tumbling by as much as 1.5% versus the Dollar.
The term typically used in the market to differentiate monetary policy decisions tilted more towards tightening policy versus loosening is ‘hawkish’. By contrast, those decisions or announcements that seem to hint towards looser policy than the market had been expecting and pricing in are referred to as ‘dovish’. The bearer of the decision or the body they represent is therefore the Hawk or the Dove respectively. President Lagarde, you could argue, was both on Thursday. Either way, the Euro did not enjoy it.
The ECB had the choice to move towards normalisation or continue to blame risks to the macro economy as an obstacle to policy development. There were plenty of excuses as we noted including the ongoing crisis in Ukraine, the global growth risk presented by China’s health policy and the uncertainty surrounding the Eurozone’s inflation outlook. Expectations had been building and were priced in via short-covering on Wednesday for the bank to establish itself more within the group of economies and central banks engaging in faster policy normalisation. Accordingly, some 71-basis points worth of hikes were priced into Euro debt markets by year end ahead of Thursday afternoon’s meeting.
The Euro tumbled as these expectations were rapidly priced out. The conclusion: the ECB will continue to plod at its own pace towards monetary tightening and adjustment. The President confirmed the pursuit of the end of negative rates and net asset purchases in the third quarter of this year, a more hawkish development versus their recent meeting. The ECB continues to place emphasis on the June meeting where a new set of inflation and growth forecasts will dictate the next step.
Discussion and Analysis by Charles Porter