ECB Vice President Luis de Guindos, ECB President Christine Lagarde, and Director General of Communications Christine Graeff. Photo by Dirk Claus/European Central Bank
Euro exchange rates came under pressure following commentary by ECB President Christine Lagarde that prompted traders to ramp up bets for an interest rate cut as early as April.
When this article was first published, we commented on the stability of the Euro in the wake of the European Central Bank's interest rate decision and accompanying statement, noting that the copy-and-paste guidance sent a clear message that the central bank was not wavering towards an early interest rate cut.
It was only after ECB President Lagarde spoke to the press that the Euro's resilience unravelled as investors became emboldened to raise bets for an interest rate cut to fall before June.
Following Lagarde's press conference, investors raised the odds of the first rate cut falling in April to 90%, with 141 basis points of easing seen across the whole year, up from 130 basis points before.
Lagarde said risks to economic growth are to the downside, underlying inflation remains on a downward trend, and wage growth is declining
“Although President Lagarde ‘stands by’ her previous comments which suggested that summer cuts are likely, the rest of her narrative appears to be supportive of earlier rate cuts,” says Seema Shah, chief global strategist at Principal Asset Management.
"The ECB is clearly data dependent, but the data they focus on are pointing to a rate cut within the next few months, potentially April. Summer might come early this year," adds Shah.
The Euro to Dollar exchange rate fell half a per cent to 1.0833 in the hours following her comments, and the Euro to Pound Sterling rate broke below 0.85 to 0.8526 (Pound to Euro = 1.1730).
Lagarde told delegates in Davos last week that it would only be in the summer when the central bank considers cutting rates.
Keeping interest rates unchanged was always expected of the ECB, and it would always be in the statement that offered excitement. On this count, there was much disappointment as the ECB did a copy-and-paste job of December's statement that reinforced Lagarde's message from Davos.
The thrust of January's low-key statement was that she meant it, or at least this was the case until she spoke.
"EUR/USD has ticked lower on the statement by ECB President Lagarde following today’s policy meeting. This reaction appears to be centred around the fact that there was no explicit push back against current market pricing in her prepared remarks," says Jane Foley, Senior FX Strategist at Rabobank.
Nevertheless, the ECB continues to argue it wants to see how incoming pay settlements land before moving on interest rates and Lagarde maintains it is too soon to talk about cuts. Therefore, it may yet be a few months before it pivots and signals the time to cut interest rates is approaching.
"As long as actual inflation remains closer to 3% than 2%, the ECB will not look into possible rate cuts," says Carsten Brzeski, Global Head of Macro at ING Bank.
The January policy update was always likely to be a place-holder event, with March seeing the release of new economic projections from the central bank.
"It would require a severe recession or a sharp drop in longer-term inflation forecasts clearly below 2% to see a rate cut in the coming months. We continue seeing a first rate cut not before the summer," says Brzeski.