- The ECB has opened the door to squeezing bond buys if conditions improve.
- President Lagarde’s mentions of the exchange rate remain muted.
- The euro benefits from Lagarde’s words that the downside risks are “less pronounced.”
Subtle changes to language can be meaningful to EUR/USD traders – the European Central Bank has left its interest rates unchanged but seems more upbeat, allowing EUR/USD to rise.
Here are three changes that have pushed the common currency higher and may continue doing so.
1) Perhaps not all the support is necessary
In the statement, the Frankfurt-based institution probably conceded to German hawks, stating that it might not use the full envelope of its bond-buying scheme. If conditions improve, it would refrain from deploying the “full envelope” of the Pandemic Emergency Purchasing Program.
2) Nothing huge on the exchange rate
Christine Lagarde, President of the European Central Bank, stated that the exchange rate is a drag on inflation – yet is one of many factors dragging prices lower. Not only is her comment on the euro’s high value relatively muted, but it is also far from what markets expected.
Given the recent weakness in the Consumer Price Index, some anticipated starker language and perhaps a hint that the bank is ready to act. That did not materialize. The ECB seems to tolerate an increase in the euro.
3) fewer downside risks
Lagarde listed the positives such as vaccines, political certainty around Brexit and the US elections, and a strong manufacturing sector. She also expressed concern about the virus’s resurgence, including the variants.
What is the bottom line? The risk to the growth outlook remain tilted to the downside but are less pronounced – thus serving as a bullish shift.
All in all, the ECB seems cautious, but also optimistic and far from thinking about a move that would lower the euro – a rate cut.Get the 5 most predictable currency pairs