Euro Stutters Against Pound and Dollar As Lagarde Mentions Rate Cuts

Above: President Lagarde. Photo: Martin Lamberts/ECB.


The Euro was set for a tepid end to the week after the European Central Bank's President Christine Lagarde entertained the possibility of cutting interest rates amidst growing confidence inflation was on course to hit 2.0%.

The Euro was the second-worst performing major currency on Friday in an underperformance that came alongside Lagarde's comments that the "hardest and worst bit" of the fight against inflation was over.

Analysts said the comments were behind a rise in European stocks as investors became more confident that interest rate cuts could come as soon as May.

The rule of thumb is that an increase in bets for ECB rate cuts, relative to elsewhere, weighs on Eurozone bond yields and the Euro.

"I think that rates, barring any further shocks or unexpected data, will not continue to go up. And if we win our fight against inflation, and if we are certain that inflation will indeed be at 2%, at that point rates will start to go down," said Lagarde, who was speaking on France 2 TV.



Thus far, the ECB President has communicated it is too soon to talk about interest rate cuts, arguing wage growth in the Eurozone would mean a fall to the 2.0% target on a sustained basis would prove elusive.

By setting out the conditions for a cut, Lagarde is signalling a pivot is underway.

The Euro to Dollar exchange rate is quoted at 1.0963 at the time of writing, down 0.10% on the day. The Euro to Pound rate is lower by a similar margin at 0.8593.

To be sure, this is not a massive underperformance, but we note some idiosyncratic elements to the Euro's weakness, given it is down against all peers, apart from the Swiss Franc.

Lagarde said she would not give a date when rates might come down, although she said inflation would be at 1.9% by 2025.

Inflation in the Eurozone rose to 2.9% in December from 2.4% in November, largely due to base effects a year earlier.