ECB meetings of 2020 should really be called ECB ‘Strategy Reviews'.

Newly minted Chair Christine Lagarde clearly wanted to give herself ‘room' having ordered a review to consider all aspects of its mandates, targets specifically inflation, performance, operational tools, communication and policy setting, plus others. It clearly leaves the ECB in a holding pattern, but that holding pattern means its highly unconventional policies setting won't change until the Strategy Review is complete.

There has been limited EUR/USD reactions over the past 3 months with most of the movement coming from the falling USD rather than anything else. European data is disjointed but has remained relatively unchanged.

This all suggests that further downside risk triggers from policy and domestic data is limited and that EUR/USD is likely to remain range bound for the near-term.



This begs the question what exactly is EUR/USD reacting too?

If we evaluate the last 12 months the pair has been most sensitive to changes in EUR front end rates specifically German 2-Year which ranks the highest on all metrics. This means if there is any shift higher in front end ECB rate expectations due to ‘noise' around the strategic review and the concerns about the longer-term impact of of the ECB's unprecedented policies settings its likely to push the EUR higher.

The counter to this is the EUR's increasing use as a funding currency. FX carry trades and international corporate borrowing due to the rates on offer, means that, over time, the EUR should start to exhibit safe haven-like characteristics – i.e., not fall, or even rise, in times of increased market uncertainty. Meaning the EUR soon will be spoken about in the same sentences as JPY and CHF.

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