Lagarde Cites Causes of Low Inflation

The Euro has been higher again this week despite a round of dovish comments from ECB chair Christina Lagarde. Speaking at the European Parliament Committee on Monday, Lagarde toll MEP’s that headline inflation in the Eurozone is “expected to remain negative over the coming months”. Eurozone inflation dipped into deflationary territory in August for the first time in four years and, according to Lagarde, this dynamic looks likely to persist in the near term.

Lagarde said that “earlier declines in energy prices, a stronger euro, and a temporary reduction in the value added tax rate in Germany” were all cited as the main drivers behind the subdued inflationary environment.

The economic situation in the Eurozone has been under increasing scrutiny over recent weeks given the rising number of new COVID cases and the growing fear of further lockdowns. Lagarde has repeatedly highlighted the great deal of uncertainty in the ECB’s outlook as a result of the ongoing pandemic. The strength in EUR has also been highlighted several times as a dampening factor on the Eurozone economy, increasing the costs of Eurozone exports.

ECB Monitoring Exchange Rate

During her comments Lagarde went on to say that the ECB “will carefully assess all incoming information, including developments in the exchange rate, with regard to its implications for the medium-term inflation outlook” and “continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.

The extent of this current period of deflation is projected to be limited with inflation forecast to rise back to an average of 1% over the next year. However, the bank is not forecasting inflation to rise above 1.3% at any point over the next three years meaning that headline CPI will remain well below the ECB’s 2% target.

Given the current downside risks and uncertainty within the outlook Lagarde was keen to stress that the bank will remain accommodative in its monetary policy approach and said that the single currency bloc would be “facing a much deeper economic contraction and more severe disinflation” had it not been for the ECB’s actions so far. The market is currently forecasting further ECB easing by the December meeting.

Technical Views

EURUSD ( Bullish above 1.1490)

The recent pull-back in EURUSD has found firm support ahead of a test of the 1.1490 level support and while above there, the near-term bias remains bullish. Bulls will need to see price quickly back above the 1.1802 level to regain upside momentum and put the 1.2090 level resistance back on the radar.

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