ECB recap: Lagarde drives EUR/USD to new October highs

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.

Market reaction

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.

CIEURUSD10282021

Source: TradingView, StoneX

How to trade with City Index

You can trade easily trade with City Index by using these four easy steps:

  1. Open an account, or log in if you’re already a customer 

    Open an account in the UK
    Open an account in Australia
    Open an account in Singapore

  2. Search for the company you want to trade in our award-winning platform 
  3. Choose your position and size, and your stop and limit levels 
  4. Place the trade

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.