Euro Surges against Pound and Dollar as ECB Fails to Push Back Against Recent Strength

• GBP/EUR spot rate at time of writing: 1.0919
• Bank transfer rates (indicative guide): 1.0637-1.0713
• Specialist transfer rates (indicative guide): 1.0755-1.0821
• More information on specialist rates, here

The Euro exchange rate complex ran higher after the European Central Bank's failed to push back on a stronger Euro, with ECB President Christine Lagarde saying that while gains had been "extensively discussed" by the Governing Council it does not target the exchange rate.

The comments were made in a briefing during its September policy event and signalled to markets that the currency can move higher before the ECB expresses discomfort and considers taking action, thereby removing a potential impediment to the extension of its 2020 rally.

The Euro had retreated on September 01 when the ECB's Chief Economist Philip Lane spooked traders after saying the Euro exchange rate does in fact matter, the comments coming on a day the EUR/USD hit the 1.20 milestone.

“The rally in EUR/USD and the trade-weighted EUR are both well behind prior rallies (2017, 2012-2014, and 2010-11),” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. “Many market participants (especially policymakers) will routinely call out exchange rate appreciation and the damaging impact that it has on consumer prices. But they’ll never acknowledge that a round of depreciation has done nothing for inflation in years. Consider that since 2017, EUR/USD fell from 1.25 to 1.06 – and the effect on inflation was minimal (in fact consumer prices declined in that time frame).”

Adding to the positive sentiment was the ECB's upgrading of growth and inflation forecasts for the Eurozone economy; they now see Eurozone GDP contracting 8.0% in 2020 whereas the decline was seen at 8.7% in June projections.

Growth is now seen at 5.0% in 2021 (previously 5.2%) and at 3.2% in 2020 (3.3% previously).

Inflation forecasts show the ECB still sees prices rising at 0.3% in 2020, which is a forecast unchanged on June.

However, inflation for 2021 is raised to 1.0% from 0.8% previously, a bullish development for the Euro.

2022 inflation is seen unchanged at 1.3%.

"ECB Governor Lagarde seemed quite confident in the prospects of a solid economic recovery, and did not seem very worried about the recent dip in inflation. This supports our baseline forecast, namely that the policies are likely to remain unchanged throughout the next year. We do still acknowledge a significant risk of further easing measures, particularly in the events of financial turbulence or a continued strong appreciation of the euro," says Kjersti Haugland, an economist at DNB Bank.

Following the developments the Euro-to-Dollar exchange rate was quoted 0.75% higher at 1.1889, the Euro-to-Pound exchange rate 0.86% higher at 0.9159 and the Euro-to-Australian Dollar exchange rate 0.50% higher at 1.6297.

The ECB announced it had left monetary settings unchanged at its September policy meeting, while also opting to maintaining its previous communications.

The main refinancing and deposit rates are left at 0.00% and -0.5%, respectively while the rate on the marginal lending facility rate also was unchanged, at 0.25%.

The decision to keep settings unchanged in itself is a story for the Euro exchange rate complex simply in that the ECB is thus far not yet willing to act on the currency's strength as there was some apprehension that some changes would be brought forward in order to try and boost inflation - which has gone negative - and stem the Euro's advance.

Above: GBP/EUR drops in wake of ECB event.

That no such developments have ocurred will therefore be supportive of the Euro's broader trend of appreciation.

"The statement accompanying these decisions is basically a copy of the statement in July. In other words, the ECB is making no changes to its policy stance today. This, in turn, indicates that the new updated staff projections will reflect a view of the world in which the central bank continues to see downside risks, but also that it believes the recovery is sufficiently on track not to merit further action. The devil is in the details, though," says Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics.