ECB policymaker de Guindos says comparison to energy price shock in 2021-22 is not right
The desk interprets ECB Vice President Luis de Guindos' recent comments as a signal of cautious optimism regarding inflation risks, suggesting that the central bank is better positioned to respond than in previous energy shocks. Per the full note source, de Guindos emphasized the need for patience and clarity in light of geopolitical tensions, particularly the conflict in Iran, which could impact growth indicators. This perspective aligns with a broader sentiment that the ECB will act prudently while monitoring economic data, particularly as inflation pressures appear less acute than in 2021-22. The consensus view among analysts indicates a target range for EUR/USD around 1.04 to 1.12, with our desk leaning towards the upper end of this spectrum.
What the desk is arguing
The desk believes that the ECB's current stance reflects a more measured approach to inflation risks compared to previous years. De Guindos' remarks indicate that the central bank is prioritizing data-driven decisions over theoretical discussions, which could lead to a more timely response to emerging economic challenges.
Supporting this view, de Guindos pointed out that energy shocks typically affect inflation indicators more quickly than growth metrics, suggesting that the ECB's cautious approach is warranted. He also highlighted the limited fiscal space in the euro area, emphasizing the need for prudence in monetary policy.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range between 1.04 and 1.12. Notable targets from other firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns with the broader consensus, as our desk's target sits at the upper bound of the range, reflecting a more optimistic outlook on the euro's strength against the dollar.
How other firms see it
Firms like jpmorgan and goldman share a similar optimistic outlook, suggesting that the ECB's careful monitoring of inflation could lead to a stronger euro. Conversely, bofa and citi express caution, anticipating potential downward pressure on the euro due to external economic factors.
Watch the EUR/USD trajectory closely, as it may reflect shifts in ECB policy and broader economic indicators such as inflation rates and geopolitical developments.
What the calendar says
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I think the inflation risk is lower this time around I think that we were late to act in 2021 and 2022 One reason was that we had too much of an academic discussion about the drivers of inflation Academic discussions are good at university and in academic fora but in central banking, you have to take decisions We have to wait before deciding on the next interest rate move Need more clarity about the conflict in Iran My impression is that the data on growth over the coming weeks are not going to be good Energy shock is usually reflected in inflation indicators much more rapidly than in growth indicators That’s why I would call for prudence, we need additional clarity with respect to the conflict I have never tried to pre-empt the rate decision Let’s see the data over the coming weeks, let’s see the projections, let’s see what happens with the conflict Markets’ response has been quite calm and that is a positive thing A big repricing in asset markets would have been very detrimental, amplifying the impact of the energy shock Fiscal space is quite limited in the euro area at a time when we need to increase defence spending Overlooking this risk would be a mistake Full transcript As a reminder, de Guindos will be seeing his term end at the end of this month. So, he can be a bit more bold with his commentary as is the case with all policymakers when they are set to depart from the central bank. So far, he's not saying too much though but is preaching patience and being more prudent.
But in the bigger picture, I'm sure he knows very well too that the ECB cannot sit by idly for too long amid the shock to the inflation outlook. This article was written by Justin Low at investinglive.com.
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