ECB recap: Lagarde drives EUR/USD to new October highs
Matt Weller, CFA, CMT October 28, 2021 10:30 AM
Ms. Lagarde's strongest statement was around the PEPP purchases ending in March, making the statement more hawkish than anticipated
To the surprise of absolutely no one (including my colleague Fiona Cincotta – see her full preview report here), the European Central Bank left main refinancing rate unchanged at 0.00% and reiterated that it would continue buying bonds at a “moderately lower pace” until at least the end of March 2022. In sticking to the proverbial script, the central bank also made only insignificant tweaks to its accompanying monetary policy statement.
As Fiona noted, the fireworks, if there were going to be any, would always be centered around ECB President Christine Lagarde’s press conference, specifically the extent to which she would push back on the market pricing for interest rate hikes as soon as next year.
On that front, we had a number of notable comments from Ms. Lagarde:
- PHASE OF HIGHER INFLATION TO LAST LONGER THAN EXPECTED BUT EXPECTED TO DECLINE NEXT YEAR
- CONTINUE TO SEE MEDIUM-TERM INFLATION BELOW TARGET
- TALKED ABOUT INFLATION, INFLATION, INFLATION
- CONDITIONS FOR A RATE RISE NOT LIKELY TO BE MET IN THE TIMEFRAME EXPECTED BY MARKETS, NOR SOON THEREAFTER
- NOT FOR ME TO SAY IF MARKETS ARE AHEAD OF THEMSELVES (Ed note: This directly contradicts the above the comment)
- HAVE EVERY REASON TO THINK THE PEPP PROGRAM WILL END IN MARCH 2022
While Lagarde predictably pushed back on the market’s interest rate hike expectations, she subsequently walked that back; meanwhile, her strongest statement was around the PEPP purchases ending in March, making the statement more hawkish than anticipated, at least in the short term. In the end, this month’s meeting was always going to be an appetizer for the December meeting, when the central bank will issue updated economic forecasts, clarify its plans for tapering asset purchases, and lay out its initial plans for monetary policy in 2022.
Based on the initial market reaction, traders are viewing the statement as more hawkish (or perhaps, less dovish) than expected, with EUR/USD rallying 80 pips on the day to hit its highest level of the month. In other markets, 10-year yields in Germany, France, Italy, and Spain are rising 6-12bps across the board while major European stock markets trade mixed.
Looking ahead, a close above previous-support-turned-resistance at 1.1670 (and ideally the 50-day EMA at 1.1680) on EUR/USD would open the door for an extended rally toward the mid- or upper-1.17s in the coming days. A failure to hold above this key zone would keep bears in control of the pair in the medium-term.
Source: TradingView, StoneX
How to trade with FOREX.com
Follow these easy steps to start trading with FOREX.com today:
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.