European Central Bank copies Fed’s innovations
ECB is tired of waiting for its turn
If somebody doubts that central-bank policies determine currency rates, look at two dates — mid-June and early September. The Fed decided to give up its tolerance policy concerning fast-growing inflation and hinted that rates might be raised in 2022 at its first meeting in summer. As a result, the EURUSD‘s uptrend reversed. Then, the ECB’s officials started talking at the borderline of August and September about curtailing monthly assets purchases, and the euro soared to the top of figure 18. Growing for nine days out of ten must mean something! A new trend, at least.
The European Central Bank is simply tired of waiting for its turn to normalize monetary policy. Investors got used to thinking that balancing on the edge of deflation is normal for the eurozone and Japan. And, boom! The currency block’s consumer price index rockets to 3%, which was last seen in autumn 2011! Back then, the ECB raised rates and thus provoked the eurozone’s subsequent economic slowdown. Christine Lagarde and her peers will hardly want to repeat the mistake, but how can they talk the market into it?
I hate two moments: when I need to set my alarm and when I need to turn it off. Central banks hate it when they need to start introducing monetary stimuli and when they have to withdraw them. That makes everyone nervous, including financial markets. What is left to do is follow the leaders. The Fed sometimes does that too. Do you think the Fed was the first to introduce negative rates and use QE as a non-traditional monetary policy? Nope! It was the Bank of Japan! By the way, it never reached its CPI target.
The ECB has already started following the Fed. Christine Lagarde implemented a similar strategy of average inflation targeting and thus escalated debates within the Governing Council. Some of the members even left the meeting, slamming the door. The good news is that they have managed to reconcile with the Frenchwoman by September’s meeting.
I’m sorry, sweetheart! I was wrong! Let’s make peace.
All right! Wait, don’t eat that. I’ll cook something else.
Lagarde is facing a challenging task: to weaken the euro and please the ECB’s hawks that insist on a graduate cut in asset purchases. The two missions seem incompatible as the EURUSD‘s quotes are growing exactly because the ECB intends to normalize monetary policy. Actually, there’s a way out! To follow the Fed’s example.
Why can’t Lagarde say on 9 September there’s no connection between a QE taper and a rate hike, just like Jerome Powell did? The Fed President had to gain time as he didn’t know how the pandemic and the labor market would develop. And he did that successfully: the USD’s weakening is one more step to better financial conditions.
Will Lagarde manage to fall asleep on the eve of the European Central Bank’s press conference in September? Why not? Her conscience is unclouded.
Price chart of EURUSD in real time mode
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