ECB mild at the conference, sharper on the blog (Daily analysis 11.09.2020)

The euro dropped from its highs gained yesterday when the head of the European Central Bank's economists slightly tightened the message compared to the dovish and cautious statements made by Christine Lagarde, President of the ECB. The pound is still under strong pressure, the GBP/PLN exchange rate dropped below 4.80 and is the lowest since mid-March.

The ECB might look more closely at the euro than Lagarde announced

Yesterday, after the press conference of the President of the ECB, the euro appreciated strongly. Christine Lagarde was very cautious about the euro exchange rate. A little later, however, Philip Lane, the head of the ECB's economists, showed a tougher approach to the single currency.

In his blog post, Lane said that inflation will remain negative for the rest of the year, while the strong euro has significantly suppressed the revision of core inflation (not influenced by the most volatile factors). He also warned that the rise in the value of the euro this year had reduced the growth prospects for future inflation, something that the ECB had already had a problem with before the pandemic came.

Lane said that "the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves toward its aim in a sustained manner, in line with its commitment to symmetry". This does not change the fact that the ECB is only monitoring the impact of the euro exchange rate on inflation for now, but concerns about the sharp appreciation of the euro in recent weeks (about 10% since March) are greater than Lagarde's message could have shown.

The euro is still strong, and the pound is getting weaker

The EUR/USD quotations after exceeding 1.1920 yesterday afternoon fell back to around 1.1810 at night and before midday rose to around 1.1860. In the context of the ECB's message provided, inflation readings in the following months may be relevant for the euro. If the inflation disappoints expectations while the euro is being valued high, the chances of a slightly sharper message from the ECB may increase.

For the zloty, apart from the increase in fluctuations around ECB-related events, the situation has not changed much. The EUR/PLN exchange rate is still around 4.45, the USD/PLN is about 3.75, and the CHF/PLN is about 4.13 - just before midday today. The relationship between the pound and the zloty is radically different. The GBP/PLN quotations fell to about 4.79, which is the lowest level since mid-March.

This is the result of increased uncertainty surrounding the agreement on a new trade agreement between the United Kingdom and the European Union. The probability of a "hard Brexit" is increasing, but even after strong declines in recent days, the valuation of the British currency still suggests that the market is expecting an agreement on the trade issue. If no agreement is reached, the British currency could potentially lose around 5-10% of its value besides strong fluctuations.