Will EUR Strength Lead To ECB Jawboning?
The ECB has been know to jawbone EUR strength, the question is whether they'll do it again this time round. What is "currency jawboning", you ask? Here is your answer: https://financialsource.co/what-is-currency-jawboning/
We have a great question from Rolando asking how far we think the ECB will allow the EUR to appreciate in the current situation of low inflation and recession and the impact it will have on export competitiveness?
This is a great question Rolando, and in terms of history, the ECB has been known to jawbone the currency once we’ve reached certain exchange rate prices versus the US Dollar. The excellent team from Nordea investment bank had a piece about this just the other day and highlighted two charts that showed how the ECB tried to jawbone the currency in previous years.
In this first chart we have examples from 2015 showing various times the ECB members tried to jawbone the EUR almost every time the exchange rate moved close to 1.1500, then in the second example they did it went back to 2017 and showed how the bank members tried to jawbone the strength every time it went above 1.20
So, there is definitely historical examples of the bank jawboning the EUR when the exchange rate reaches levels, they felt uncomfortable with.
With the dependency on exports for countries like Germany the recent appreciation has seen some speculative questions on whether the ECB can allow this to continue, as recoveries in the Eurozone has usually been led by net exports, so arguably a stronger EUR would hamper that.
According to the bank’s June forecasts the current levels of the EUR is substantially higher by about 9%, so the strength will definitely not go unnoticed by the bank.
Interestingly though, ING investment bank had a great research article out recently that talked about this, and said that recent research by the ECB concluded that the more credibly and effectively monetary policy counteracts external inflationary pressures, the lower the pass-through of exchange rate movements will be.
Thus, the bank would be able to use the current exchange rate as well as their downward inflation revisions as further arguments for increasing and extending their current Pandemic Emergency Purchase Program. So, in that sense, the bank might not have the same inclination to jawbone the currency as one would expect.
However, having said that, at 1.19 today it is definitely something that the export part of the economy can’t be happy about, especially given the shock exports had already gone through with the pandemic already and given the drop in inflation we’ve seen so far.
So, I think there is reasons for them to accept the current appreciation according to the work that ING bank has done, but I also think there is reasons for them to want to keep the appreciation in check when it comes to exports and inflation, and it will be something interesting to keep in mind for the upcoming ECB meetings as long as the EURUSD continues to break to new highs.
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