Lagarde Offers Nothing New, Leaves Euro in Decline

Last week the attention was mostly on the Jackson Hole Summit, with expectations from FED’s Powell and ECB’s Christine Lagarde, although most traders didn’t know what to expect. This made trading volatile for most assets, with uncertainty being quite high. The USD has been on a bullish trend all this month, but buyers were showing doubt last week. We saw some decent retraces higher in EUR/USD , indicating this volatility, but in the end, this pair ended up down.

The Eurozone economy has been softening and last week we saw both manufacturing and services sectors reporting PMI readings below 50 points. When the Purchasing Managers’ Index (PMI) drops below this threshold, it indicates that the respective sector is undergoing contraction. The manufacturing activity was already in recession and it dived deeper, while in August the activity in the services sector also fell in contraction.

The ECB was sounding quite hawkish before, but the recent economic figures are indeed concerning and have prompted traders to adjust their expectations concerning the European Central Bank (ECB) actions. Specifically, the market’s anticipation of a 25-basis point interest rate hike by the ECB before the conclusion of 2023 has been scaled back. This revision is significant, given that the odds were reduced from 78% just last week to the current estimate of 57%. However, Lagarde’s speech didn’t hint at any policy change such as stopping hikes.

So, given the further economic weakness and the shift in traders’ sentiment, the ECB meeting minutes, scheduled for release on August 31, are already outdated. Although, Lagarde sounded more confident that inflation would fall in target later this year, which is a strong dovish sign. So for now we will remain bearish on this pair, selling retrace higher. Below are her main comments at the Jackson Hole Symposium:

ECB President Lagarde Comments at the JHS

• “Pretty confident” that by end-2023 inflation numbers will look different
• Disinflation has to be ‘timely’ and ‘sustainable’
• “Pretty confident” that by end-2023 inflation numbers will look different
• German growth not broken and demonstrating resilience
• Proximity to war in Ukraine part of the reason for differing economic paths for US and Europe
• Changing inflation target would be ‘deceptive’ and counter to anchoring expectations

That’s a dovish headline from Lagarde, though hardly a signal about a September pause.

EUR/USD