ECB: Further Currency Shifts May Strengthen Euro’s Global Role
- The ECB has published its annual report into the euro. President Lagarde’s foreword notes that:
- “The euro continued to hold its position as the second most important currency globally” in 2024.
- “Further shifts may be underway in the landscape of international currencies. The tariffs imposed by the US Administration have led to highly unusual cross-asset correlations. This could strengthen the global role of the euro and underscores the importance for European policymakers of creating the necessary conditions for this to occur.”
- “The number one priority must be advancing the savings and investment union to fully leverage European financial markets. […] The planned issuance of bonds at the EU level – as Europe takes charge of its own defence – could make an important contribution to achieving these objectives.”
- The report goes on to note that “the share of gold in global foreign reserves at market prices, at 20%, surpassed the share of the euro (16%). Survey data suggest that two-thirds of central banks invested in gold for purposes of diversification, while two-fifths did so as protection against geopolitical risk.”
- Euro strength has received close attention from policy makers since its decoupling with factors such as rate differentials, something that first started with EU/German defence and infrastructure investment plans before kicking up a gear with US reciprocal tariff announcements in April.
- The holding of relatively high EUR/USD rates (currently 1.1436) appears to have given Governing Council members added confidence that a deposit rate of 2%, reached after last week’s 25bp cut for 200bp of easing for the cycle, leaves policy in a good place with implications of a pause ahead.
- Lagarde has previously talked on the potential benefits of a growing global role. This from May 26: “Increasing the international role of the euro can have positive implications for the euro area. It would allow EU governments and businesses to borrow at a lower cost, helping boost our internal demand at a time when external demand is becoming less certain.”
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BOE: Lombardelli: On whether there would have been cut without trade uncertainty
Lombardelli on what was the progress on disinflation and whether it would have been enough for a cut without the trade uncertainties: "coming into the May round... are we still continuing to see this progress [on disinflation]? We did see some data that continues to support the disinflation argument. But you know, you sort of have to keep your eye on this. You have to be aware of and... focused on inflation. We have had inflation above target for a long period, and that is something that we we would like to see... come down and see these pressure. These pressures are there in the economy. You can see them in wages. You can see them in services prices. So it is something that we're sort of still focused on, the trade. Obviously, the trade, as I say, sort of at the margin, supported that same direction of travel, right? Which... we expect that to reduce inflationary pressure looking forward. So they moved in the in the same direction, which made the judgement in May a bit easier in, in that sense. But... how confident are we are in [disinflation]... that's the key question going forward, right? Is what we will we continue to see this progress. You know, we hope so. We've seen it so far, but we'll continue to monitor it."
BOE: Lombardelli: Inflation exp not "dominating effect" to stay restrictive
"Spend a lot of time, as you expect, looking at, talking about inflation expectations... I wouldn't have said that was a sort of dominating effect on keeping policy restrictive at the moment. You know, we watch it, we think about it, but as I say, it's just one of the many things that feeds in. It's not like I say it's not, it's not the reason that we've we're keeping policy restrictive at the moment. That's much more about. What are we seeing on the wages data, the services, inflation, the broader picture on on dis inflation there. So it's, you know, one factor, not the dominating factor, and sorry, I forgotten the final question."
BOE: Lombardelli: Pay settlements more important than waiting for AWE
"At the moment, wages are not target consistent. They're well above that. We are expecting them to come down. As you say, what I think we would need to see, it's not waiting until AWE is target consistent... I think seeing the pay settlements that we will get quite a lot of data on this year, if those continue to be consistent with what we're we're seeing I think that will provide quite a lot of reassurance that we can continue on this gradual path."
