• Joel

EUR Bears Deflated as ECB Green-lights Further EUR Rally

EUR bears were left disappointed today. Prior to today’s ECB meeting EURUSD was sat just below 1.1850. Now it is back above the 1.1900 level.

After last week’s bout of EUR jawboning (Chief Economist Phillip Lane noted that the EURUSD rate “matters” and ECB members reportedly told the FT that they were concerned by recent EUR appreciation) that brought EURUSD back from highs around 1.2000 to this weeks lows just under 1.1800, ECB President Lagarde explicity refrained from commenting on the exchange rate.

“I will not comment on the level of EUR” she said, passing her opportunity to express concern over recent EUR appreciation and subsequently weaken EUR.

But it was not comments from Lagarde that sent EUR rocketing. Right as she started to speak, newswires reported a comment from “ECB sources” which said that the ECB had agreed now to “over-react” to EUR appreciation.

Many traders took this as the ECB giving the “green light” for EURUSD to go back above 1.2000, hence the near 50 pip immediate pop to the upside in the cross.

Giving traders even less reason to be short EUR, Lagarde’s tone in the press conference was much less dovish than most would have guessed.

Though she did reiterate that continued monetary accommodation is still necessary and that risks remain tilted to the downside, she played down the importance of recent poor data in the Eurozone, saying the recovery was on track with ECB forecasts and that “temporary” factors were behind August’s negative inflation number.

Indeed, the ECB even revised higher its inflation forecast for 2021 (and left forecasts for 2020 and 2022 unchanged), contrary to suggestions in last week’s FT report that inflation forecasts would be downgraded to account for the stronger EUR.

Remember that in recent days we have also had more hawkish leaks from ECB members? (i.e. Bloomberg yesterday reported that some ECB members were becoming more confident in their forecasts for the recovery, reducing the need for further stimulus).

Well, it appears as though ECB President Lagarde is more on the hawkish side; she very much gave across the impression that the ECB is happy with how things are playing out and to pay the waiting game for the time being.

So much for market expectations for a further EUR 350bln to be added to the PEPP (the ECB’s Covid-19 QE programme, called the pandemic emergency programme) by the end of the year.

Moving forward, as long as USD doesn’t see a substantial rebound (perhaps driven by a significant worsening in global data, or big rise in US/China tensions, or perhaps a Trump election victory), EURUSD should remain supported over the coming weeks/months as the ECB looks very much like it is set to underwhelm.

1.2000 in EURUSD here we come!


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