Nomura: Lessons From Past ECB Verbal Interventions

Nomura note that "while the ECB's current stance may put downward pressure on euro in the short term, it will be difficult to change the euro's upward trend, in our view. Unlike 2017, the ECB does not currently face a market that is pricing hawkish monetary policy action. Instead, the market is already pricing in the risk of rate cuts down the line. As a result, it is likely to be very difficult for the ECB to ameliorate the euro's upward trend. If the ECB's additional easing does not result in interest rates becoming deeply negative, but rather a credit easing response, such as the expansion of the Pandemic Emergency Purchase Program (PEPP), the euro could react negatively in foreign exchange markets. We look back at past ECB comments and verbal intervention against euro appreciation, as market interest in the ECB's stance on the euro's recent appreciation is rising ahead of its policy meeting this week. Based on our analysis, the ECB`s stance can be divided into three stages. Stating its core principles, monitoring the exchange rate and promulgating policy change as a result. We are currently somewhere in between the first and second stages, with this week's ECB meeting holding a potential risk of escalation. But overall we remain long EUR/USD in cash as the drivers of USD weakness remain intact."