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ECB is ready to let EUR/USD run but rally to prove temporary

ECB President Lagarde sent the euro higher toward 1.19 by saying it doesn’t target the exchange rate. Rally may be limited as the bank sees the pandemic as a significant downside risk, according to FXStreet’s analyst Yohay Elam.

Key quotes

“It is uncommon for a central bank to comment on FX – but investors were eyeing such remarks following previous murmurings about the value of the common currency. Lagarde acknowledged that her institution discussed the topic and also said it has a dampening impact on inflation – yet alongside other factors.” 

“Investors priced verbal intervention to weigh down on the euro, and when Lagarde mostly dismissed it, EUR/USD rallied from around 1.1850 toward 1.19. Analysts also foresaw an upgrade to GDP estimates – which happened but only for 2020. The Frankfurt-based institution foresees an output downfall of 8%.”

“The bank refrained from expressing confidence in the outlook. Lagarde stressed that risks are tilted to the downside, focusing on the coronavirus pandemic. She stated that the increase in infections over the summer may already be dampening growth.”

“Immediately after warning on high uncertainty related to COVID-19, Lagarde reiterated the bank’s readiness to provide additional stimulus. The current Pandemic Emergency Purchase Program (PEPP) stands at €1.35 trillion and is on course to be exhausted in June 2021. Extending and enlarging it is probably on the cards in the coming months.”

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