There was a Bloomberg opinion piece earlier in the week making a case for a dovish ECB actually supporting the euro and stocks.
Christine Lagarde will want to ‘talk the Euro down’ at the press conference today at 1330BST. This is because a strong euro harms the eurozone’s export markets. Recently the ECB has expressed their concern with a strong euro and is obviously keen to see EURUSD below 1.2000.
However, there are only a limited number of policy tools she has to use. The median expectations are for €350 billion in extra asset purchases, so some extra stimulus could be added. The ECB could also speed up the pace of asset purchases. Aside from that, there is not a whole load that can be done. A move lower in rates looks unlikely. The negative interest rates approach by central banks across the world has not been embraced by the Fed and that is holding up rates globally for now. Central banks tend to follow the Fed’s lead. The Fed has opted for Average targeted inflation for now.
So, could Christine Lagarde actually talk down the Euro and eurozone growth prospects and end up supporting the Euro and stocks? The normal scenario for these events is that central banks loosen monetary policy and dovish central bank messaging leads to less favourable interest differentials and a weaker currency. So, if these dovish measures take place then the vanilla response would be euro weakness.
However, Bloomberg is out with a piece suggesting that this time it could be different. Here is their thinking summarised. In the last few months, aggressive bond-buying has been accompanied by a massive injection of fiscal stimulus at a national and EU level. Germany has spent €220billion and pledged to do more. France has spent €57billion and the EU itself has promised €750billion.
This should provide a supportive mix for the eurozone and with it make the shared currency and European stocks more attractive. The heart of the thinking is that a strong and co-ordinated money and fiscal stimulus approach should support the eurozone and the euro.
So, if we see strength for the eurozone out of tomorrow’s meeting this may be why. Certainly, one scenario to keep on top of.