EUR/USD may fall under ECB President Christine Lagarde

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  • European leaders have been struggling to divvy up the top jobs.
  • IMF Chief Christine Lagarde is emerging as a potential candidate to lead the ECB.
  • Her views are dovish and may push EUR/USD to new lows.

European leaders have usually been able to reach compromises – or “euro-fudges” – after long nights in Brussels. This time, divvying up the top jobs in the European Union is taking longer than expected. The central row is over the top position of the President of the European Commission.

The horse-trading between German Chancellor Angela Merkel, French President Emmanuel Macron and their 26 colleagues has already seen various names for all the key positions. For euro traders, the post of President of the European Central Bank is the only game in town.

If the latest reports are to be believed, the Managing Director of the International Monetary Fund (IMF) has been leading the race for the top job. How will Lagarde shape up the ECB?

Lagarde’s ECB

The French politician is significantly dovish. As head of the IMF, she has advocated monetary and fiscal stimulus, calling on both central banks and governments to keep helping the economy.

On June 5th, 2019, Lagarde wrote an article for the IMF’s blog titled “How to help, not hinder global growth” and called for more action. Here is a quote, emphasis mine:

Our expectation was that global economic activity would also benefit from the more patient pace of monetary normalization by the US Fed and the European Central Bank, and from increased fiscal stimulus in China. And indeed, these policy responses have provided vital support over the past few months, including by easing financial conditions and increasing capital flows to emerging markets

Moving from Washington to Frankfurt, Lagarde can practice what she has preached – cut interest rates to deeper levels and resume Quantitative Easing – following in the footsteps of incumbent ECB President Mario Draghi.

But will she able to deliver? 

Lagarde has significant clout given her experience leading the IMF – including during the worst years of the euro-crisis – and at her previous post as French finance minister. She is well-known and well-respected in both economic and political circles.

The IMF MD is not a trained economist – she studied law, like Fed Chair Jerome Powell – but that should not impede her given her vast experience and clout.

However, she is a politician. And a French one. Northern European states led by Germany may frown upon extraordinary measures that may be required in the span of an eight-year tenure. The divided between northern creditor countries and southern debtor countries – to simplify – may intensify if the economic situation deteriorates.

Lagarde may be torn between the interests of her country and the demands of the German Bundesbank and may struggle to oversee more monetary stimulus without drawing criticism.

While she may have an easy path to resume Quantitative Easing that Draghi has gradually ended and trim negative interest rates further. However, if further steps are needed, Lagarde may have a harder time than Draghi given her political background.

Conclusion

Overall, she may encounter difficulties in doing “whatever it takes” – as Draghi famously said – in a full-blown crisis.

However, in the short and medium term, Lagarde’s nomination to lead the ECB may result in a weaker euro, perhaps sending it to new lows. She is significantly more dovish than most of the other candidates, especially Germany’s Jens Weidman and Finland’s Olli Rehn – the latter overseeing austerity.

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Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.