ECB intrigue upsets Euro narrative

Wednesday proved to be a busy day even before the much awaited UK CPI data that all but confirmed a Bank of England interest rate cut come the March 19^th meeting. Instead, we had intrigue in the early hours of the morning as the Financial Times printed an article that suggested European Central Bank (ECB) President Christine Lagarde would exit her role before the official conclusion of her term in October of 2027.

The Euro initially reacted very poorly to the news and remains nearly -0.4% down against the Dollar as of time of writing, illustrating just how little EUR traders care for intrigue.

The ECB fired back and unconvincing response shortly afterwards, stating that Lagarde “has not taken any decision regarding the end of her term”, an implicit agreement with the rumour of her early departure. As with many areas of intrigue, the root seems to be politics,  with the “old guard” of the European community (ie. France and Germany) becoming frightful of the prospect of a right wing victory in the French elections of April 2027 and a subsequent up scuttling of the “middle of the road” candidates the European Council has always favoured for ECB President.

Should Lagarde stay the course, which seems unlikely given the ECB’s statement today, and should the French right triumph in the April elections, we may expect to see a showdown in the European Council between a pragmatist (supported by the more establishment elements) and a more dovish candidate (backed by the European right).

Regardless of who triumphs in such a scenario, such a wrestle within the Eurozone would deal serious damage to the cosy narrative that the bloc represents a “serious and calm alternative” to the US Dollar.

French yields also reacted badly to the implication, although whether this illustrates traders anxieties over Lagarde stepping down, or a general realisation of the predicament the Orthodox Council members find themselves in, is difficult to say.

Still, the Euro has struggled to arrest its decline throughout the day, with even the out of sorts Pound managing a modest rally against the common currency. Euro bulls will be hoping that if Lagarde is to resign, a successor would be quickly and easily found, although, with as slow a structure as the EU, that may be easier said than done.