ECB Gives Euro Traders License to Resume Rally Against Dollar

The euro advanced on signs the European Central Bank isn’t panicking about the currency’s recent rally against the U.S. dollar, pushing back the prospect of further monetary policy easing.

The euro rose nearly 1% to $1.1917 after ECB President Christine Lagarde avoided expressing concern over the exchange rate, and stated repeatedly that the common currency was not a “policy target for us.” Options bets that the currency may rise above $1.20 resurfaced, and fund investors added long positions in the cash market, according to traders in Europe.

Early into her press conference, a report said that policy makers agree there’s no need to overreact to the currency’s gains.

ECB Gives Euro Traders License to Resume Rally Against Dollar

The messaging is a relief to euro bulls, who worried that the ECB may start jawboning the currency in a decline after Chief Economist Philip Lane said that the exchange rate did matter for policy. He spurred speculation among analysts and investors that Lagarde could seek to pave the way for more easing after the euro jumped above $1.20 for the first time in more than two years.

“It’s clear that the ECB is watching the euro carefully,” said Ebrahim Rahbari, global head of foreign-exchange analysis and content at Citigroup Global Markets Inc. “But it would take further appreciation -- we think at least another 5% -- for it to become truly policy-relevant.”

European bonds fell on Lagarde’s comments on the currency, despite her assertion that it was very likely for the entire 1.35 trillion euro ($1.6 trillion) pandemic bond buying program -- the central bank’s key tool for propping up the economy in the face of the coronavirus -- to be spent. Traders in money markets now don’t see an interest-rate cut in the next year. Earlier this week, they saw a move in September 2021.

German 10-year yields rose four basis points to minus 0.43% as of 3:35 p.m. in London, while Italian bonds erased gains. The euro rose 1.5% versus the pound to 92.15 pence. The ECB kept its emergency monetary stimulus and policy rates unchanged.

The market has pared “hopes that the ECB will cut rates,” said Christoph Rieger, head of European rates strategy at Commerzbank AG. “A couple of days ago, a 10-basis-point rate cut was still fully priced in by next summer.”

©2020 Bloomberg L.P.

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