The fiscal euphoria around the EUR remains in place this morning, enabling it to shrug off tariffs and negotiation wobbles. On paper, this should not have been a good morning for the EUR. Its recent surge has been built largely on hopes for greater support for growth from German fiscal policy, perhaps echoed in other parts of Europe. The Green Party’s Robert Habeck this morning said “obviously they miscalculated” in reference to the main parties’ assumption of support from the Greens for the fiscal proposal. The FX market appears to have dismissed the comment as negotiating noise ahead of a likely agreement. The EUR has also shrugged off the arrival of new tariffs on exports to the US, and retaliatory tariffs from the EU. This tangible escalation in the trade war provoked no FX reaction, suggesting this too is viewed as temporary noise that will be resolved. After the EUR’s precipitous rally, it seems the market is happy to hope for the best on both fronts, or perhaps the prospect of a ceasefire in Ukraine has provided some bullish offset.
It is a busy day ahead for ECB speakers, and Christine Lagarde has already offered a non-committal, balanced tone. The ECB’s president noted that “trade fragmentation and higher defence spending in a capacity-constrained sector could in principle push up inflation” – something for the hawks there. But then she added that “US tariffs could also lower demand for EU exports and redirect excess capacity from China into Europe, which could push inflation down” – keeping doves energised. (Bloomberg) One such dove was Mario Centeno who said he would “prefer to move sooner rather than later”, arguing that the economy “isn’t showing the strength required for inflation at 2%”. (Dow Jones) But his colleague Gediminas Simkus said that while the direction of travel for rates has not changed, it would be “irrational to commit on future rate decisions”, and we “will see in April if we cut or pause.” (Bloomberg) The market remains justifiably and evenly divided on an April rate cut.
It is a busy day ahead for ECB speakers, and Christine Lagarde has already offered a non-committal, balanced tone. The ECB’s president noted that “trade fragmentation and higher defence spending in a capacity-constrained sector could in principle push up inflation” – something for the hawks there. But then she added that “US tariffs could also lower demand for EU exports and redirect excess capacity from China into Europe, which could push inflation down” – keeping doves energised. (Bloomberg) One such dove was Mario Centeno who said he would “prefer to move sooner rather than later”, arguing that the economy “isn’t showing the strength required for inflation at 2%”. (Dow Jones) But his colleague Gediminas Simkus said that while the direction of travel for rates has not changed, it would be “irrational to commit on future rate decisions”, and we “will see in April if we cut or pause.” (Bloomberg) The market remains justifiably and evenly divided on an April rate cut.
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