Lagarde’s terrible explanations push the euro/dollar to sharp falls

The interest rate hike of 50 basis points announced by the European Central Bank caused sharp falls in the price of euro dollarThe complete opposite of what should have happened.

The most traded currency pair in the world is heading back towards parity, hampered by the confusion caused by the speech of the President of the ECB Christine Lagard, and the doubts generated by the TPI, the new mechanism against fragmentation.

It also didn’t help the community currency the resignation of Mario Draghi and the collapse of Italian bondsalthough the real headache for the market came with the words of the French banker.


Miscommunication from the ECB

“The 50 point rise should have given the euro wings, the problem is that the ECB and Lagarde are terrible in communication,” he said. Miguel Ángel Rodríguez, expert currency analyst at the broker Capex.

Specifically, when Lagarde was asked about rate hikes in the coming months, she first hesitated, then twisted the information, and ultimately left a shadow of uncertainty among investors.

In addition, “he did not know how to explain the TPI program well”, he added. Rodriguez.

The conditions of access to possible aid are very vague and include political criteria. For example, Italy would not be eligible under these criteria, leading to further declines in Italian bonds.

The problem is that Draghi she had just resigned shortly before Lagarde’s speech, and the President of the ECB added fuel to the fire instead of putting out the fire.

“The markets were expecting a generous support package for countries like Italy. The ECB presented a program with few details and little transparency where it is not clear whether Italy could be eligible,” he agreed. Paul DuarteSenior Analyst at the Research Institute Flossbach by Stork.

The euro suffers in the absence of a clear roadmap

Beyond the communication errors, the problem is that the ECB It does not have a clear roadmap for managing monetary policy expectations, which ended up accelerating the falls of the community currency.

“The ECB board has decided to drop any future guidance on rate decisions at upcoming meetings, saying they will be data-driven and remain flexible,” he said. Duarte.

“The market is trying to force Lagarde to give clear guidance on when they will use the tool and the ‘whatever it takes’ commitment, while Lagarde still doesn’t want to say too much,” he said. he declares. Kaspar Hense, BlueBay Asset Manager.

The feeling is that the ECB has alarmed the markets instead of calming them, which again put the euro/dollar on the path to parity.

What the ECB clarified “is that it does not control the inflationary situation and that, unlike the Federal Reserve, it does not seem to have the necessary determination to act”, he explained. Duarte.

Can Italy leave the euro?

The third derivative that has depressed the euro is the open political crisis in Italy. The collapse of the government Mario Draghi and his subsequent resignation sparked uncertainty and opened the door to an eventuality that terrifies the market: victory in the September elections by a Eurosceptic candidate.

The derivatives market has started to rule out this possibility, which would result in a possible exit of Italy from the euro, with a strong rebound in instruments for hedging Italian debt, called CDS.

Concretely, the premium paid by investors for these insurances has climbed to a high in 2018, according to data from Bloomberg.

Investors are simply paying these prices because they fear an Italian debt default, which could lead to an exit from the single currency. The same thing happened with Greece during the debt crisis.

The fact that the premium for these derivatives is at its highest level in four years reflects “Italy’s political instability and the withdrawal of ECB stimulus”, Rabobank analysts noted.

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