Euro-Dollar on Front Foot after ECB's Lagarde Breathes Life into Policy Conversation

Above: File image of Christine Lagarde. Image © IMF. Image reproduced under CC licensing conditions.

- EUR eyeing key level on charts after ECB holds rates and QE.  

- 13:30 press conference unlikely to trouble the EUR this noon. 

- Market already priced for growth and CPI forecast downgrades.

- EUR now eyeing 200-day and 200-week averages on charts.

- After rising above five-month downtrend in overnight session.

- But will take cues from GBP amid election, and post-Fed USD. 

The Euro remained on its front foot Thursday after the new President of the European Central Bank Christine Lagarde breathed fresh air into the continental policy room, but the single currency must still navigate a minefield of risks littering the path into the weekend including the UK general election and the U.S. Dollar.

Thursday's decisions are the first to emerge under Lagarde, the former head of the International Monetary Fund, and came alongside modest tweaks to growth and inflation forecasts that should ultimately keep any Euro strength limited going forward. 

The ECB left all of its rates unchanged, with the deposit rate held at its new low of -0.50% while rates on 'main refinancing operations' and the 'marginal lending' facility remained unchanged at 0% and 0.25% respectively. It also confirmed the purchase of the first €20 bn installment of bonds as part of the quantitative easing (QE) program announced in September, which will continue alongside the negative interest rate policy "until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics."

"Today’s ECB meeting keeps the EUR funding characteristics intact. No longer meaningfully cheap EUR vs. USD, sluggish growth and little prospects of ECB tightening all mean that the euro will continue to be used as a funding currency of choice in 2020. The upside to EUR/USD is very limited," says Petr Krpata, Chief EMEA FX and IR Strategist at ING Bank.

Lagarde breathed fresh air into the policy conversation in saying the Eurozone is not "near Japanification" and nor is it close to the 'reversal rate' at which stimulus is thought to do more harm than good to an economy, although she did reiterate calls for governments to do more in order to boost growth. 

Both of the former terms have increasingly been used in relation to the Eurozone in recent months as the ECB was widely said to have effectively ran out of policy bullets following its September rate cut and QE decision. Lagarde also said a 'strategic review'  is long overdue but declined to provide details of what it will entail, other than saying that it's likely to take until the end of 2020. She first floated the idea last month. 

The ECB needs faster economic growth if it's to meet its long-elusive inflation target of "close to but below 2%", but the Eurozone slowed throughout the first half the year before appearing to stabilise in the third quarter. The bank has cut its deposit rate further below zero in response and restarted the quantitative easing program that it had only just shuttered at the end of 2018.

Despite the ECB event cementing the current settings that are ultimately keeping the Euro soft on a long-term basis, the Euro did manage to recover some lost ground, moving higher to challenging its 200-day moving-average located around 1.1154 level against the Dollar, which would open the door to 1.1180 and levels above if broken, some technical analysts say.

Above: Euro-to-Dollar rate shown at hourly intervals. 

"EUR/USD has broken through the five month downtrend line at 1.1105 and thus targets the 200 day moving average at 1.1154 and also the October high at 1.1180. Further up meanders the 200 week moving average at 1.1358 which is also being eyed. It represents a critical break point on the topside from a medium term perspective. Key nearby support is the December 6 low at 1.1040," says Karen Jones, head of technical analysis at Commerzbank 

Looking ahead, the single currency must still navigate the UK general election as well as the inevitable twists and turns of the Dollar.

The UK is at the polls and voting in an election that will be instructive of the Brexit process for at least the foreseeable future, while markets are waiting to hear whether President Donald Trump will clobber all of China's remaining U.S.-bound exports with new tariffs from Sunday.

Above: Euro-to-Dollar rate shown at daily intervals.  

Thursday's election matters most to the trajectory of Pound Sterling but also to the Euro given that it will set the agenda around Brexit and due to the fact the UK is a significant export market for some key Eurozone economies.

Markets favour a Conservative Party victory over the increasingly radical opposition Labour Party and the pollsters have led them believe that's exactly what they're going to get. Exit polls are out from 22:00 and the result will be known in the early hours of Friday.

President Trump's decision is doubly as important as the last because these levies will hit consumer goods and so could be felt by American households and impact consumer price inflation figures. But they'll also deliver another blow to the global economy, including to the already-troubled Eurozone that has arguably suffered more in the trade fight than either of the two protagonists. 

The two sides have been attempting to reach a 'phase one deal' that addresses U.S. concerns about Chinese trade practices, which was already said to have been reached back on October 11. However, White House language has since shifted from declarations that one has been done, to claims that one could simply "be done". Without an agreeement that satisfies Trump, China's remaining untariffed exports to the U.S. will incur a 15% levy.

China's Commerce Ministry said Thursday the country is in communication with the U.S. but would not provide further comment. Meanwhile, U.S. Agriculture Secretary Sonny Perdue said China is refusing to commit in a contract to purchases of agricultural goods the U.S. side says it already agreed to. President Trump is set to meet with his trade advisers on Thursday. 

Getting VERY close to a BIG DEAL with China. They want it, and so do we!

— Donald J. Trump (@realDonaldTrump) December 12, 2019

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