Pressure on the ECB to act after the new lockdown of France and Germany


– France announces strict 5-week lockdown
– Germany closes the hospitality sector
– The economic impact must be significant
– Lagarde in a hurry to answer
– The euro could fall in such a scenario

The Vice-President of the ECB, Luis de Guindos, the President of the ECB, Christine Lagarde, and the Director General of Communication Christine Graeff. Photo by Dirk Claus / European Central Bank

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Will be the European Central Bank Christine Lagarde “tears up the scenario today” and delivers the kind of surprise that has the potential to rock euro exchange rates?

The question is relevant given that the October ECB policy meeting comes just hours after the eurozone’s two largest economies announced they would begin new nationwide lockdowns.

German Chancellor Angela Merkel said the country will begin a four-week lockdown from November 02 and announced measures including the closure of bars, pubs and restaurants. Gyms, cinemas and theaters must also close while hotels are too close to tourists but can only remain open for “essential reasons”.

Indoor gatherings are prohibited for more than 10 people and between more than two households and shops must remain open but with a maximum of one person per 10 square meters.

French President Emmanuel Macron announced tougher restrictions overnight, saying the country would enter a five-week lockdown that would see non-essential businesses shut down and travel outside the home restricted to exercises, work and home. purchase of essential food. Anyone outside their home must be provided with a document justifying their excursion, which can be checked by the police.

Macron has gone further than many political commentators and economists anticipated and the economic impact will therefore be greater, and the ECB is being asked by some economists to react accordingly.

“Lagarde has to tear up the scenario today, we think she will,” says Claus Vistesen, chief eurozone economist at Macroeconomics of the Pantheon. “The ECB will signal that more stimulus measures are coming today; we expect more QE in December. ”

The foreign exchange manual says that when a central bank surprises the markets, the currency it issues reacts.

Markets had expected a regular ECB meeting this week with policymakers who will lay the groundwork for potential adjustments to the Bank’s policy easing program in November or December.

The risk is that the ECB adopts a more accommodating tone and moves earlier; a surprising result which would probably have an impact on the euro exchange rates.

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The euro has already come under pressure against the US dollar this week as expectations began to be felt that Germany and France would tighten restrictions and the risk is that the ECB will accelerate recent moves. The euro-dollar exchange rate is currently listed at 1.1750 after falling nearly one percent already this week.

The euro also appears vulnerable against the pound, which is attracting some buying interest amid positive developments in post-Brexit trade talks, the latest details of which can be found here. The euro-pound exchange rate is at 0.9033 and may drop below 0.90 in the event of an ECB event which moves the market, the pound-euro rate is currently at 1.1070 and may pass at 1.11 and above.

“The new locks won’t be as severe as in the first half of the year, but we’re getting closer to the point where the difference is semantics. In other words, if the major ZE economies shut down everything except retail and schools for a month, we “go back to the foreclosure economy,” Vistesen says.

Pantheon Macroeconomics previously assumed the eurozone would experience a stable quarter of economic activity in the worst-case scenario, “but a sharp contraction is now in the cards,” Vistesen says. “The ECB will have to change its tone today. ”

Pantheon Macroeconomics expects the ECB to signal further support, but they won’t be quite ready to pull the trigger today.

In a “very conciliatory” scenario, economists ING Bank NV say the EUR / USD exchange rate would risk falling below 1.15, which would take EUR / GBP to 0.90 and potentially lower.

In such a scenario, the ECB would signal that the inflation outlook for next year has deteriorated and is “very worried”, while the announcement of risks is clearly on the downside.

“Macron announced an almost complete five-week lockdown in France from tomorrow (schools remain open), going further than expected. Germany has also announced a partial one-month shutdown, starting on Monday (closing bars, restaurants and leisure facilities). hit on the two largest economies in Europe increases the pressure on the ECB which is meeting today, ”says Elsa Lignos, Global Head of Foreign Exchange Strategy at RBC Capital Markets.

The partial shutdown of the eurozone’s two largest economies means that the ECB is likely to find that the risks to the economy are now firmly on the downside. RBC economists don’t expect the ECB to introduce any new measures today, however, but will instead give indications of what could happen in November or December.

“While an extension of the PEPP program appears to be a deal struck in December, question marks persist over whether rates can be adjusted downward and, if so, which ones. Further, if the TLTRO terms can be extended over time and the prioritization multiplier can We expect Lagarde to leave clues about the direction the ECB Governing Council is taking, ”Lignos says.

If the ECB stands firm and signals that it needs more time to assess recent developments, the euro may find itself supported.

“The ECB will likely recognize the worsening COVID-19 pandemic, but will likely postpone any further political action until the December 10 meeting, which should avoid increasing pressure on the euro for now,” Robert said. Mialich, forex strategist with UniCredit Bank.

While recent developments do not favor the outlook for the euro zone single currency, some analysts have noticed how resilient it is, which could mean that the downside potential is limited.

“Despite the second wave in Europe, the significant downward revisions to the near-term growth outlook for the EZ zone and the market expecting more easing from the ECB at the end of the year, EUR / USD has been quite resilient for the amount of negative EUR specific news, ”says Petr Krpata, Chief EMEA FX and IR Strategist at ING.

Markets remain of the view that a clean sweep of Democrats in the November election will prove favorable to equities and risk appetite, which in turn will weigh on the dollar.

This topic will become more and more relevant to the forex markets as the vote approaches, meaning that the primary focus for traders will potentially shift from Europe to the United States.

“The balance of risks seems fairly balanced. Overall, declines to the lowest 1.17 are expected to continue to be taken by market participants who predict that a significant US fiscal stimulus package will fuel the strength of the euro by the end of this year. the year, regardless of the current weakness in European domestic demand, ”said Lars Sparresø Merklin, senior analyst, currency strategy, Danske Bank.

The only risk with the US election is that the outcome is inconclusive, leading to weeks of legal wrangling creating the conditions for a dollar rally.

This, combined with the easing of ECB expectations, would lead to significantly lower euro exchange rates.

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