ECB policymaker de Guindos: Recent euro appreciation deserves attention but not dramatic

Euro appreciation deserves attention but I do not see it as dramatic at allWe do not target the exchange rate but we monitor it closelyThere was a brief uptick in EUR/USD exchange rate recentlyBut we are now back to the range around 1.16 to 1.18, which is fully consistent with the assumptions included in our projectionsThere have been no surprises in that regard but we remain attentive to the situationGeopolitical situation is better now than it was three weeks agoBut volatility remains very high, hard to know what could happen in another three weeksInflation data to start the year has been in line with our expectationsOverall trend is in line with what we had projectedWe remain data-dependent and approach each meeting with open mindsLagarde mentioning economy being in a “good place” has to be put into contextI would prefer saying the economy is more resilient and inflation is converging to our targetThe phrasing “good place” simply refers to the economy and inflation moving in the right directionBut markets understand well our policy stance and what we are doing, our communication is clearFull transcriptThere’s a lot of big and heavy words in there but the gist of it is that the ECB remains sidelined on the policy front at the moment, and policymakers are quite comfortable with how markets are interpreting their stance and communication. That is pretty much the key takeaway from the larger chunk of his remarks above.However, the more interesting bit is the one on the exchange rate. He specifically outlines that EUR/USD has been hovering in between the 1.16 to 1.18 range “for a long period”. And during the interview last Friday, the currency pair was still keeping just below the 1.18 mark – in what he defines as “back to the range which is fully consistent” with their projections.He was also detailed enough to mention “a brief uptick”, which is likely what we saw at the end of January where EUR/USD moved to 1.20. As a reminder, that was a level that de Guindos had mentioned before that is “complicated” for the central bank. So, this is consistent with that view.This week, we are seeing EUR/USD climb back up to 1.19 and is holding just a little above that today. That will definitely keep the ECB on alert, with more verbal interventions to set in if we do see the currency pair extend higher towards 1.20. So, be on the look out for that.
This article was written by Justin Low at investinglive.com.

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