Lagarde exit rumours sparks succession buzz

The strategic rationale behind her potential departure is not without justification either. As per the FT, her early departure would give French President Macron and German Chancellor Merz a bigger say in her successor, as upcoming elections could herald a pivot towards EU-scepticism and anti-Euro Area integration (think Marine Le Pen in France). Lagarde’s age (she will be almost 72 when her term ends), and the unfortunate reality that her tenure has not been without the odd misstep or two, perhaps add to the plausibility of the story.

At any rate, mere speculation of her early departure will probably accelerate the conversations surrounding her potential successor. A number of names are in the hat at this early stage, with the following seemingly the most obvious choices: 

Klaas Knot: A former Dutch central bank chief who has pushed for prudence amid inflation fears. Hawk. 

Pablo Hern?ndez de Cos: Former Bank of Spain governor that has emphasised gradualism and downside risks to growth. Dove. 

Joachim Nagel: German Bundesbank President that has advocated for vigilance on inflation. Seen as among the most hawkish ECB members. 

Isabel Schnabel: ECB Executive Board member that favours a higher neutral rate. Hawk.

While we think that a potential leadership challenge at the ECB would not dramatically alter the path of ECB rates, or have a major impact on the euro, the disruption and uncertainty could inject an element of volatility to markets. There seems to be very little appetite in the Governing Council for any change in rates in 2026 (markets see no real risk of either a cut or a hike this year), so even a very early change in leadership would unlikely have any bearing on ECB policy until at least 2027.

A hawkish successor (Knot, Nagel or Schnabel) could raise the risk of faster tightening if inflation rebounds, which would be bullish for the euro, whereas a dove (Hern?ndez de Cos) could push for a more accommodative stance. 

In the meantime, we could see some modest downside in the euro should markets react unfavourably to the prospect of an early-Lagarde exit and a step into the unknown. Even the mere speculation of Lagarde stepping down could conceivably erode her credibility and authority in upcoming communications. As with incoming Fed Chair Warsh, however, it's also worth remembering that the new central bank chief will still be but one voting member on the committee, and even though the president of the ECB acts as an agenda-setter and moderator during discussions, they rarely override the broader consensus.