ECB & EUR: Pouring oil into the fire
The ECB didn't surprise on the dovish side today. No rate cuts and a muted QE would normally lead to higher EUR/USD. But the lack of conviction that the ECB is willing to do ‘whatever-it-takes’ reintroduced risk premium into the EUR. Now the ball is in the Federal Reserve's court to send EUR/USD higher
As we wrote earlier, the European central bank announced a series of measures, hoping the several, targeted but smaller measures can make a difference.
On first glance, it's nothing overwhelming and underscoring the view that the ECB's usual unconditional toolkit (for cutting rates further into the negative territory and increasing QE meaningfully) is largely exhausted and government actions on the fiscal side must be taken to make a difference to the economy.
Under normal circumstances, the apparent lack of dovishness from the ECB would lead to a stronger EUR and higher EUR/USD, particularly if the Federal Reserve is likely to cut interest rates aggressively and speculation about the Fed's QE plans continue to rise. Yet, two factors lead to the weakening, rather than strengthening of the cross:
- The clear break down in markets, where funding issues in the cross-currency basis swaps market and the sharp decline in equity markets pushed USD higher across the board (even against the safe-haven yen). See USD: The wrong kind of rally for more
- The lack of perceived conviction from ECB President Christine Lagarde that the central bank is willing to do whatever it takes to help euro asset markets.
The remarks “we are not here to close spreads” do risk re-introducing a risk/credit premium into EUR assets and are reminiscent of pouring oil into the fire. The widening of the BTP-bund spread, as shown below in the figure provides the case in point.
10Y BTP-Bund Spread
Looking beyond the very short term, we still see scope for higher EUR/USD and the cross to return to 1.15 should the Fed deliver aggressive rate cuts and move towards QE. Moreover, any signs of a possible road to the coordinated eurozone fiscal easing in the European group meeting taking place next week could also help to the euro.
But with no ‘whatever-it-takes’ moments today, the euro has the renewed potential issue to face – the risk premium issue – particularly if eurozone states fail to deliver credible fiscal stimulus.
Download
Download article
13 March 2020
In case you missed it: Pandemic pandemonium This bundle contains 13 articles"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).