Lagarde Warns over Economic Impact
The single currency has come under heavier selling pressure today in response to comments made by ECB chief Christina Lagarde. Speaking this morning, Lagarde cited concerns over the resurgence of COVID in recent weeks and the loss of economic momentum heading into Q4.
Speaking to the Committee on Economic and Monetary Affairs of the European Parliament today, Lagarde struck a notably dovish tone as she shared fears over the downward impact of the fresh uptick in COVID cases and deaths currently tearing through the eurozone.
The ECB head said that the fresh wave of cases and deaths is exacerbating the already high level of uncertainty with the latest survey and high frequency indicators showing that economic activity has weakened into Q4. Specifically, Lagarde said the second wave of the virus is heavily impacting the services sector.
Need To Bridge The Gap Until Vaccines Take Effect
While Lagarde cited optimism over the recent vaccine news, the ECB head was keen to point out that it will be of no immediate benefit and the real focus is on plugging the gap in the economy until such time as the vaccines are working effectively and the recovery is running off its own momentum. With this in mind, Lagarde said it was more important than ever for monetary policy and fiscal policy to keep working hand in hand.
Further Support Needed
While Lagarde has praised the combined efforts of banks and governments in response to the crisis, the ECB chief also called on the need to do more saying that “So far, government support measures, particularly short-time work schemes, have protected households against job losses and a drop in incomes. But this has not prevented unemployment from spiking in some countries. In addition, consumers are expected to remain very cautious in the current highly uncertain environment as the ramifications of the pandemic are threatening people’s employment and income prospects.”
Inflation To Stay Weak Until Early 2021
In terms of the broader impact of the virus, Lagarde said: “The weakness in economic activity since the onset of the pandemic is also reflected in inflation developments. Low energy prices and the temporary reduction in German value added tax are dampening inflation. But weak demand, notably in the tourism and travel-related sectors, and significant slack in labour and product markets are adding further downward pressure.” Looking ahead, Lagarde said: “we expect that headline inflation is likely to stay in negative territory until early 2021.”
EURUSD continues to hold around the pivotal 1.18 level which has acted as a magnate for price over recent months. For now, price remains within the upper end of the bullish channel which has framed the recovery this year. While the bias remains bullish for now, momentum is weak and a drop down to the 1.1602 level cannot be ruled out.
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