There are three key hurdles why the ECB won’t be able to credibly lean against the euro:
- Despite recent ECB officials’ comments, the euro is not actually strong. While EUR/USD is up by 4% over the past six months, the trade-weighted euro (which matters for the ECB) is, in fact, largely flat.
- The potential disinflationary effects of a stronger euro are likely to be mitigated by the rise in the oil price.
- Drivers of exchange rate moves matter. Given the latest strengthening of the euro is also partly a function of solid Eurozone economic growth, such a strengthening should do less harm to the economy.