How The Market Is Forcing The ECB’s Hand

The European Central Bank (ECB) delivered its last monetary policy decision for the year a few days ago. Last Thursday, it eased the financial conditions in the Euro area to unprecedented levels. Also, it expressed concerns about the ongoing strength in the Euro exchange rates, as it puts pressure on inflation. 

ECB has an inflation-targeting mandate. It aims at price stability below but close to two percent. Therefore, a stronger currency weighs on inflation, and this is particularly a problem in times when inflation is close to the zero level as it is now.

Yet, the chart below reflects something else. It shows the three main Euro exchange rates – EURUSD, EURGBP and EURJPY, and how they keep rising, despite the ECB’s efforts.

Euro at 2020 Highs

If it manages to close the year at the current levels, the common currency will close at 2020 highs. While many focus only on the EURUSD pair, it is not just about the EURUSD, but other pairs reflect the same strength. In other words, the market puts pressure on the central bank.

It would not be for the first time such a thing happened. We all remember what happened when George Soros bet against the Bank of England paid handsomely.

Only this time, things are different in the sense that central banks have more tools to intervene. They also act in a concerted manner if we only consider the regular meetings of the world’s central bankers at the Bank for International Settlements.

Yet, one cannot escape the feeling that the ECB is losing credibility. It is not about the current exchange rates, which continue to rise despite the ECB’s desire. Instead, it is about the message that the market sends to the ECB.

On the one hand, the ECB complains that the higher exchange rate pressures inflation. Hence, it should/would not tolerate a higher Euro.

On the other hand, the Euro keeps rising, with the market participants calling the ECB bluff. After all, what can the central bank do except talking the currency down?

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Disclaimer: None of the content in this article should be viewed as investment advice or a recommendation to buy or sell. Past performance/statistics may not necessarily reflect future ...

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