Lagarde – “leave no stone unturned”

As expected, the ECB kept policy on hold yesterday, while confirming that the strategic policy review is now formally launched. Lagarde kept the option of additional policy adjustments on the table, but also noted that the downside risks have somewhat receded and the cautiously optimistic view on the trade front in particular backs the view that the ECB is set to remain on hold through this year in the central scenario.

The strategic policy review, which was officially launched yesterday, will keep central bankers busy, with Lagarde signalling that inflation measures but also inflation perceptions will be at the heart of the review.

The ECB left policy and guidance unchanged, with the ECB still arguing that the overall situation justifies the negative interest rate environment and still stressing that it remains ready to adjust all measures if necessary, with the balance of risks still tilted to the downside. However, this time Lagarde added that they have become less pronounced as some trade uncertainty is receding.

During the Q&A session Lagarde admitted that there had been a discussion on the latest developments on the trade front and whether recent developments, which of course included the signing of the Phase-1 trade deal between the US and China, justified changing the wording and concluding that the risks are now more balanced.

In the end it seems most policy members backed at least a softening of the “downside risk” comment and indeed Lagarde did sound somewhat more optimistic on that front. The ECB President also saw positive signals in the tone and conclusions of the meeting between the new Commission President Von der Leyen and US President Trump.

She admitted that those talks are preliminary, but it seems the ECB’s central scenario is that an escalation of lingering trade tensions between the EU and the US can be avoided.

That in turn ties in with the ECB’s signal that the worst of the economic outlook may be behind us, which backs the view that the central bank is now firmly on hold.

The door to additional steps has been left open, but it is clear that the focus is now on the strategic policy review, while central bankers urge policy makers to implement supportive fiscal policies. Lagarde is not aggressively calling for fiscal easing, but she was very clear that policy measures that support investment and growth will also help the ECB going forward. It would certainly also help to end the negative interest rate policy.

All in all pretty much as expected, with the ECB firmly on hold and apparently relatively optimistic that the worst may be behind us and that greater clarity on trade will also help to lift confidence going forward.

Against that background the central bank clearly remains in wait and see mode. The insurance policy remains in place, but in the central scenario the next move for rates will be higher, although we don’t expect that to happen this year.

In the forex markets, EURUSD had plied less-than-20-pips ranges near 1.1035, while EURGBP scraped out a new 5-week low at 0.8386. Meanwhile, European bourses are mildly weaker, with the Euro Stoxx down -0.4% and GER30 off -0.5%. However in the latest sessions GER30 has found a footing overnight from 2-week lows.

The support came on the back of steady Eurozone composite PMI earlier, but also on ECB Lagarde’s interview on Bloomberg TV today. The French central bank head stated that she sees stabilisation in the economy and additionally, that the ECB should try and mitigate the side effects of low rates, thus confirming that this will also be part of the ECB’s policy review, that is expected to last through to the end of the year.

Today’s data supported the index further back to the 13,560 area, strengthening the continuation of the positive outlook in the medium term. Since GER30 has been supported quite well by the 50-day SMA for the past 4 months, the swing lower on Tuesday might have been seen as a buying the deep opportunity by market participants.

Rebounding from the 13,400 Support and breaking out above the Resistance at 13,550 (January 10)  could turn the attention towards the 13,900 area, which is the 127.2 Fibonacci level from the August upleg co-located with the 100% FIb. extension. However, the bulls need to sustain a decisive breakout above Wednesday’s high at an all-time high, at 13,639, in order for this to strongly reinforce the positive momentum.

Momentum indicators remain strongly configured, with the RSI at the 60 mark and Stochastics flattened at 50 whilst MACD is positively set up. The Support of a 5-month uptrend comes at 13,250 in the medium term, while today immediate Support comes at 13,396.