Euro pairs are on a tear lower. Since the start of the trading week, Euro has traded with a bearish tone against all major currencies – the GBP, AUD, CAD, USD, or the JPY. Since the start of the trading year, it lost some ground but still remains elevated enough to trigger dovish ECB remarks.
In one of the first interviews of the new year, Christine Lagarde, the President of the ECB, mentioned again the risk that the high exchange rate has on inflation. More precisely, the ECB refers to the EURUSD exchange rate.
Yesterday the ECB released the monetary policy meeting accounts. These accounts, equivalent to the Fed’s FOMC meeting minutes, represent a detailed recording of all the discussions that took place at the previous Governing Council discussion.
As it turns out, the high exchange rate was a topic intensely debated.
A Summary of the Most Recent ECB Policy Meeting Accounts
The introduction of the ECB accounts was meant to increase transparency – and credibility. A central bank strives to be credible and transparent if it wants its action to be understood by the population and to have an easier time to fulfill its mandate.
The accounts of the December meeting showed a broad agreement to the monetary policy presented by the bank’s chief economist, Philip Lane. Some members favored a larger envelope for the Pandemic Emergency Purchase Programme, while others advocated only for a moderate increase. Nevertheless, a consensus existed for an increase, which the ECB delivered.
As for the Euro exchange rate, concerns were voiced by members of the Governing Council in regard to the high exchange rate and its weight on inflation. After all, the ECB has predominantly one mandate only – price stability below but close to 2%, but inflation now threatens to break below zero. Hence, with inflation so far away from the target, it feels only reasonable for the accounts to mention the members’ concern.
In the meantime, the Euro eased from the highs. Market participants are well aware of the fact that the first ECB meeting is due next week, and the risk is that the central bank may decide to act. Why now?
Several reasons exist, among the most compelling one being the extended lockdowns throughout Europe as the second wave of the pandemic hits hard the old continent.
Why wait, when Germany extends its lockdown to April and wants to apply even tougher measures, and France just announced yesterday a curfew starting with 06:00 PM?