MNI SOURCES: ECB Wary Of Euro Rise, Confidence Dip

The European Central Bank is likely to emphasise that it does not target any particular level for the euro but will note the disinflationary impulse from a record high weighted exchange rate at next week’s meeting, though it is unclear whether the reference will be made in the statement or left for the news conference, Eurosystem sources told MNI.

One approach would be for the ECB to deploy its standard lines about monitoring but not targeting the exchange rate, one official said, noting that the Governing Council will be briefed on the effects of the higher euro by Chief Economist Philip Lane in his regular presentation.

“Whether to make a reference in the statement or in the press conference will also depend on where the exchange rate stands at that point,” the official said. “But it is not as simple as saying that it is disinflationary and leaving it at that. It has effects that go beyond imported inflation via commodities and the hit to our exports that we have been warning about. It makes us less competitive, as we have been seeing.”

No official saw any immediate need to consider moving the deposit rate from 2%, with the ECB having described its monetary policy as being in a “comfortable position,” and expecting inflation to be at or very close to its 2% target over coming years. But disinflationary risks from currency appreciation further complicate a panorama clouded by geopolitical uncertainty and U.S. President Donald Trump’s unpredictable tariff threats. (See MNI SOURCES: ECB Sees Slightly Disinflationary Tariff Hit)

“Our growth has been running above expectations. We will see whether the drop in confidence also affects it. But in the days before and after Davos we have seen changes in business confidence and in the overall climate, just as we had been recovering,” an official said.

"COMPLICATED" LEVEL

While the central bank chiefs of both Austria and France have already publicly sounded the alarm over the euro’s gains this month, which saw it rise briefly above the USD1.20 mark identified by ECB Vice President Luis de Guindos as “complicated” last July, officials expressed no willingness to repeat such clear jawboning or to give the market any fresh targets. (See MNI SOURCES: ECB Seen On Hold For Extended Period)

“Guindos’s remark was made in a personal capacity. And as I said at the time, I do not think it was positive, because the market will test that level as a limit,” another national central bank official said, “In any case, right now I see it more as a psychological threshold than as a formal ceiling. I assume [ECB President Christine] Lagarde will be asked about it and we will need to prepare the response.”

The euro is at record levels in trade-weighted terms, several officials noted, putting particular emphasis on its gains against the yuan, which has not only further facilitated Chinese exports into the eurozone but has made it harder for European firms to compete against Chinese vehicles and other products in markets elsewhere. The accounts of the ECB’s last meeting already referred to a “second China shock.”

TRADE-WEIGHTED HIGHS

The euro’s trade-weighted exchange rate has reached new highs since 2023, but its recent gains have been driven by broad dollar weakness, as Trump openly pushes for a weaker greenback and pressures the Federal Reserve to ease policy. The U.S. currency strengthened on Friday, following a report that Kevin Warsh would be the next Fed chair, but uncertainty over U.S. policy in particular will remain very elevated. (See MNI SOURCES: ECB Monitors Markets For Fed Independence Fallout)

“Our monetary policy decisions are made in light of our price stability target,” an official noted. “Does the currency impact that? Of course it does. But it is one factor amongst others. That said, is euro-dollar at 1.25 likely to be more disinflationary than at 1.15?  Of course. But there is not a trigger number.”

He added, “I’m sure the higher euro will come up in the chief economist briefing next week, but we will not act hard. I’m sure Christine will emphasise the fact we do not target any level, although she could of course note that a higher euro will be a further pressure on both exporters and import prices.”

Another official pointed to a speech by Philip Lane in December, which detailed the implications of exchange rate pass-through, noting that on the inflation front “a sharp forex move while important, can easily be overblown.”

“We should be careful, because if [dollar depreciation] what it reflects is higher inflation in the U.S., we could face some spillovers that the exchange rate would only be partly cushioning,” another source noted.

An ECB spokesperson declined to comment.