ECB Quick Analysis: Lagarde exposes EUR/USD to the downside, unconvinced by green shoots

The European Central Bank has left rates unchanged as expected.
ECB President Lagarde has been cautious in her press conference.
The ECB's reluctance to cheer recent developments leaves EUR/USD exposed.

Yohay Elam FXStreet

A wise owl – that is what Christine Lagarde, President of the European Central Bank aspires to be. She said that back in December and has been wearing an owl pin in the January rate decision.

Her press conference seems to be wise – if her intention was not to rock the boat. EUR/USD has maintained its narrow range, with implied volatility digging to new lows.

Nevertheless, the former Managing Director of the International Monetary Fund may have left the world's most popular currency pair exposed. Lagarde refrained from cheering the recent positive developments. These include an increase of both headline and core inflation, a rise in business confidence, and the recent trade deal between the US and China. Germany seems to have escaped a recession, but there has been no mention of that.

Lagarde has only repeated what the ECB said in its meeting minutes from the latest event – that there are indications of rises in core inflation – albeit in line with expectations. She stressed that the Frankfurt-based institution is ready to do whatever is needed.

More QE?

The ECB has no intention to stop its Quantitative Easing program which runs at €20 billion per month. Moreover, Lagarde said that the bank will take the climate emergency into consideration, implying the potential for further money printing.

Perhaps the strategic review will provide answers? Perhaps, but the large exercise that the ECB has launched just now is expected to reach a conclusion only in December.

Overall, without acknowledging the improving economic environment, the euro is exposed to more falls. EUR/USD has already hit the lowest since early December. And more may come, unless a positive trigger is found.

The focus now returns to the data, especially forward-looking figures. Markit's preliminary Purchasing Managers' Indexes for January are up next, and they could provide further fireworks – not necessarily to the downside.

See Eurozone PMIs preview: Upbeat expectations seem justified, opening the door for EUR/USD gains

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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