EUR and ECB: Not rocking the boat
The ECB did not surprise today but the glimmers of positive news on the economic outlook were a marginal EUR positive. While the language on FX was somewhat stronger than in Dec (ECB is ‘’very attentive’’), the reduced downside risk to the economy and EUR being below its 6-month average doesn't suggest imminent action. We expect more EUR/USD gains this year
Modestly more hawkish vs expectations
As expected, the ECB did not deliver a meaningful surprise today (see ECB Review). One can argue that the bias of the statement and of the press conference was towards a hawkish side (vs expectations) as (a) the ECB judged that the downside risks to the economic outlook are less pronounced; and (b) the ECB acknowledged it may not have to spend the entire Pandemic Emergency Purchase Programme (which it topped up by EUR 500bn last month).
Attentive to the exchange rate...
The main focus was on the comments on the currency. President Lagarde reiterated the previous sentence that the central bank monitors the exchange rate ‘’very carefully.’’ However, she also added that the central bank is ‘’very attentive’’ to FX developments. The language with respect to FX is thus somewhat stronger than the last time, but given the ECB's assessment of the economic outlook (''downside risks less pronounced''), President Lagarde's focus on positives during the press conference (Brexit deal, vaccination,...) as well as the fact that the trade weighted euro is below its 6-month average, all suggests that the FX market should take the exchange rate comments with a pinch of the salt and the impact on the euro should be very muted. We thus see the overall muted, yet modestly postive reaction of the EUR/USD to the press conference as fully justified.
The trade weighted euro does not show signs of excessive strength
... but no imminent ECB action is likely or justified
While we don’t rule out further verbal interventions or even a policy reaction in response to currency strength, for this to happen the euro would have to strengthen sharply and meaningfully first. At this point, this is not the case, with the trade weighted euro being currently at the level where it was when the ECB official embarked on the verbal intervention last summer. Hence, there is no imminent need for the ECB to react at this point.
More upside to the euro ahead
Looking ahead, we expect further gains in EUR/USD and target 1.30 by the year-end. While the idiosyncratic euro story remains unexciting (the eurozone will not outperform the US economy this year and any ECB policy normalisation is a very distant story), we expect the bearish dollar dynamics to dominate as the USD will suffer from the mix of negative rates, a non-reacting Fed to rising inflation and the global economic recovery. Under these conditions, the dollar should remain on a broad-based decline, and in turn push EUR/USD higher.
Download
Download article
22 January 2021
A new age of ‘history and hope’ This bundle contains 8 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).