MNI SOURCES: Pandemic Response, Not FX Rates ECB Policy Driver

The unpredictability of U.S. presidential election season and the wider priority of battling the pandemic's ongoing economic impact point to the European Central Bank maintaining a watching brief on the euro's rise against generalised dollar weakness, despite the inflation dampening implications for the eurozone, Eurosystem sources have told MNI.

"There is growing speculation around the strength of the euro," one Eurosystem source said. "For the time being, this is not very important, although it will not help inflation that's for sure," he added, without expanding on his inflation comment.

A second national central bank source agreed that the current strength of the euro "wasn't a big issue" and the sustainability of the rise was still questionable. While this source conceded that "here and there in the Eurosystem some people are getting a bit more nervous," it had to be remembered that the current exchange rate against the dollar "is still very much at its longer-term average."

BELOW AVERAGES

The euro has risen by around 9% to around EUR1.1820 against the dollar since mid-February, but remains below the pair's lifetime average rate of EUR1.2035 and the past 10-year average of EUR1.2180.

Although again dismissing the current stronger euro as "no big worry", a third source, also from a Eurosystem constituent central bank, had certainly taken note of the single currency's deviation from its two-year moving average against the dollar, which stands at EUR1.1225.

"Clearly what matters here is, first of all, the fundamentals, the narrowed interest rate differential,"

this source said, but he also saw uncertainty surrounding November's U.S. presidential election as another source of generalized dollar weakness.

"Once there is a clear winner the dollar will rebound, but not yet," the source continued. At the same time he cautioned that in the event of no clear result, or President Donald Trump losing the election and disputing the outcome, "we may see further strengthening of the euro".

ECB RATE CUT NOT FORESEEN

"I wouldn't link too directly the strength of the euro with monetary policy," this third source told MNI, stressing that the pandemic and the response to it was still the most important factor underlining the Governing Council's policy making.

"I recall Philip Lane when he said that we are not going to have a V recovery in Europe, which means that even with a stronger euro, against sterling or the dollar, ECB monetary policy will be there for the next few months," he elaborated.

"Clearly we are not going to have a drop in already-negative rates if we have a stronger euro. But asset purchases, targeted liquidity, collateral easing, all these things will be there. More credit easing. Perhaps the PEPP will see more purchases."

The thinking was underlined by a fourth Eurosystem source, who agreed policy would not be dictated by the euro's level but may nonetheless run congruent with potentially undercutting euro strength.

"Our policy will be highly accommodative for the foreseeable future and there is always the possibility pandemic developments will push us to further easing. But that will be the policy driver, not the exchange rate," he said.

An ECB spokesperson declined to comment to MNI for this article.