Kazaks is one to say that a “big and rapid” strengthening in the euro could warrant a policy response by the ECB. And that is something that will stand out among the recent remarks, which includes ECB president Lagarde’s one yesterday.
In her press conference, Lagarde mentioned that “a stronger euro could bring inflation down beyond current expectations”. However, she brushed aside concerns in saying that EUR/USD has been moving “very much in line with the overall average”.
That being said, I’d take any mention of this as saying that we are within distance of the ECB’s pain threshold towards the currency. And it seems that there is a fine line drawn closer to the 1.20 mark for EUR/USD at the moment.
Besides Kazaks, we are also hearing from Villeroy today in saying that “downside inflation risks are probably more significant”. Adding that the ECB has “no specific FX target” but that the exchange rate is an important aspect in managing economic activity.
Then, there’s also policymaker Stournaras out saying that the euro appreciation recently “hasn’t been dramatic”. However, he notes that the central bank is staying alert and keeping a close watch amid the uncertain global backdrop.
Taking all that in, it’s the fact that we’re simply hearing more and more from ECB policymakers touching on the exchange rate that stands out. Typically, you’d see them not have to talk about the euro currency at all.
But the fact that they have to go out of their way to play down concerns or make any mention of it speaks to the likelihood that we are close to testing their limits. If the dollar does suffer again down the road, keep a very close watch on the 1.20 level for EUR/USD.
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