Taking A Minute
Yesterday’s release of the minutes of the ECB’s December 14 policy meeting, being perceived by the market as more hawkish, prompted a move higher in the value of the euro (EURUSD, EURGBP, EURJPY). But perhaps one issue that traders might wish to consider is that while the minutes said “the language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in ” the ECB also added that while there was a widely shared view that “communication would need to evolve gradually, without a change in sequencing.” Specifically stipulating ‘without a change in sequencing’ might indicate an attempt by the ECB to temper a wider market reaction to a seemingly slightly more hawkish approach.
While the ECB seems committed to updating forward guidance “in line with evolving data with a view to avoiding more abrupt or disorderly adjustments at a later stage,” it likely still wouldn’t want to trigger a near-term surge in the value of the euro which would be disadvantageous to its hopes of generating inflation of close to but below 2 per cent in the euro zone, or render euro zone manufacturers who export outside the currency bloc less competitive. The ECB’s problem is that the currency market will, as is usually the case, be the ultimate arbiter of the euro’s external value. The risk, as the ECB no doubt were reminded of on Thursday, is that the currency market doesn’t feel it needs to wait for the ECB to make up its mind. The currency market can act if it collectively concludes a direction of travel is quietly being established. Whether, on this occasion, December’s ECB minutes are enough to underpin a more sustained broad rally in the euro’s value through the end of this week and into the next is a judgement only individual traders can make.
Written by Neal Kimberley, External Currency Analyst.