Euro Overview

The euro jumped to one-month highs against the dollar, shrugging off the European Central Banks attempts to downplay bets that rising inflation could force into raising rates as soon as next year.

The European Central Bank left interest rates and asset purchases unchanged, as expected, but the ECB governor Christine Lagarde, hinting at higher for longer inflation, struggled to convince traders that bets on sooner rather later rate hikes were misplaced.

Lagarde conceded that the decline in inflation would “take a little longer than we expected,” reflecting energy, recovery demand that is outpacing supply, though added that the medium-term outlook remained intact.

But market participants arent convinced and believe the central bank has grown more concerned about inflation.

“In our view, the ECB is clearly crawling back from its fully convinced view of inflation being transitory,” ING said.

“This was among other things reflected in the finer details, for example, the scrapping of a sentence such as Measures of longer-term inflation expectations have continued to increase, but these remain some distance from our two per cent target” but also in the assessment that wages will rise, it added.

This subtle change in the central bank‘s stance on inflation doesn’t help its case and will continue cast doubt on the ECBs inflation outlook.

“When you fudge the arguments and interpretations, they take over the drivers seat. Folks who have been through multiple cycles know full well that markets tend to lead central banks on the way in and the way out more often than not,” Scotiabank said.

Lagarde also pushed back, though unconvincingly, on market bets for the bank to raise its deposit facility rate by 20 basis points to minus 0.3% by December 2022.

“Our analysis certainly does not support that the conditions of our forward guidance are satisfied at the time of liftoff as expected by markets, nor any time soon thereafter,” Lagarde said.

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