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ECB sees "strong rebound" signs, monitoring FX

(Reuters) - European Central Bank President Christine Lagarde said on Thursday that data suggested a “strong rebound” in the euro area, with the economy contracting less than expected this year.

FILE PHOTO: A man cycles towards the European Central Bank (ECB) headquarters in Frankfurt, Germany, July 8, 2020. REUTERS/Ralph Orlowski

The bank now expects GDP to shrink by 8.0 percent this year, better than the 8.7% contraction it expected in June. Inflation projections were little changed at 0.3% for this year and 1.0% in 2021. On the euro’s recent rise to two-year highs, Lagarde said the bank would “monitor closely” the currency’s strength.

STORY:

ECB TEXT

HIGHLIGHTS

MARKET REACTION:

BONDS: Euro zone bond yields rose on Lagarde’s comments, with German 10-year yields hitting a one-week high at minus 0.43%.

FOREX: The euro EUR=EBS also rose to one-week highs above $1.189. Against sterling, it firmed one percent to 91.6 pence, a 5-1/2 month high EURGBP=EBS.

COMMENTS:

PETER KINSELLA, GLOBAL HEAD OF FX STRATEGY, UBP

“The PMI data we saw recently would suggest the worst-case scenario was less likely to manifest, so what Lagarde said is consistent with what data has been showing.

“The truth of the matter is they realise there is not a lot they can do (about euro strength), aside from increasing the size or pace of the PEPP programme.

“The euro zone has been able to sustain euro-dollar exchange rate at $1.60, so a move to $1.30 is manageable for the economy. The real issue is that they want to avoid an aggressive pace of currency appreciation.”

CARSTEN BRZESKI, EURO ZONE, CHIEF ECONOMIST, ING

“It’s a bit of a balancing act for the ECB. On the one hand Lagarde is mentioning the euro is a dampening factor on inflation, but at same time the ECB didn’t revise down its inflation projections. So there is a two-sided message that is being taken by markets as not dovish but owlish, which is just how Lagarde wants to be perceived.

“We still expect an expansion of the PEPP (Pandemic Emergency Purchase Programme) by the end of the year but there does appear to be a division on the Governing Council.”

HINESH PATEL, PORTFOLIO MANAGER AT QUILTER INVESTORS

“Lagarde is premature pointing to a continued recovery. It would have been far more prudent to acknowledge the outlook is not as clear-cut as they hoped, particularly given she has indicated the full stimulus package will need to be used.”

PASQUALE DIANA, SENIOR MACRO ECONOMIST, ACOMEA SGR

“I would have expected a slightly more explicit tone on the strength of the euro, even though we already knew that it would have been difficult to intervene verbally on the strength of the currency in a credible way without making any changes in monetary policy.”

SEEMA SHAH, CHIEF STRATEGIST AT PRINCIPAL GLOBAL INVESTMENTS

“Markets know there is very little that the ECB can actually do to weaken the currency. Rates are almost as low as they can possibly go and the various asset purchase and lending programmes are already sizable. What’s more, the euro is strengthening for all the right reasons: improving growth, relatively contained COVID infection rates, and positive developments in the fiscal stimulus region.

“The ECB revised its inflation forecasts for 2021 modestly higher. While this suggests less immediate pressure to follow the Fed’s footsteps in revisiting its inflation framework, the pressure must be on.”

GURPREET GILL, MACRO STRATEGIST GOLDMAN SACHS ASSET MANAGEMENT

“In line with today’s meeting statement, we expect European monetary accommodation for the foreseeable future. The ECB continues to characterise risks to the outlook as being tilted to the downside given uncertainty around the evolution of the pandemic. The European recovery has recently outpaced other advanced economies, most notably the U.S. and UK, though we have observed moderating momentum in recent data.

“In any case, we expect asset purchases and the use of lending facilities to remain the preferred policy tools, as opposed to deeper negative rates.”

Reporting by Sujata Rao and Jonathan Cable in London, Danilo Masoni in Milan; Editing by Catherine Evans

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