The ECB’s Inflation Issues

Since the beginning of the pandemic the Euro has appreciated 11.6%, with its peak of price reaching just the fabled $1.20 against the United States Dollar on Tuesday. Though the rise was not long sustained with the EURUSD sitting above the $1.20 line for a mere 3 minutes, it has members at the European Central Bank and currency traders thinking about inflation.

The Issue

The ECB has for many years tried to curb the euro-dollar at the $1.20 mark. Under Mario Draghi the previous President of the European Central Bank, jawboning was a common occurrence as well has monetary policy measures aimed and bring the euro down. The rise in the euro is coming off the back of the weakening USD, regardless the implications of a high euro-dollar rate remain the same.

Having a stronger euro means, the European union who are heavily reliant on exports are exposed. Having the euro valued higher against the dollar makes them less competitive and it also restricts inflation further by reducing import prices.

Mario Draghi

During Mario Draghi’s reign, we would regularly see him jawbone the currency down when he could, citing that a higher euro would cause economic harm and traders got used to it. Since 2015 there has only been 4 months all consecutively that the euro prices have risen above the $1.20 line, and at that time quantitative easing and jawboning was widely practised by the ECB, which successfully devalued the Euro.

Drawing a line

The next steps for the euro are yet to be determined but its is as you would imagine heavily dependent on the actions of the ECB. We know they have drawn a line in the sand previously at the 1.20, and then fiercely defended that line, now all eyes turn to current ECB President Christine Lagarde.

Christine Lagarde

September 10 is the next time we should be hearing a scheduled release from Lagarde, after the ECB’s next monetary policy meeting. Considering the actions taken by the FED recently, and the impact on the euro, it makes forecasting the next event from the ECB difficult. The question many of us will be asking is if Lagarde is going to take the same path as her predecessor or will we be seeing a new strategy? The one certainty, inflation data has turned negative, and that’s is not what the ECB or Christine Lagarde wants.