Hawkish Lagarde Comments

Comments from ECB’s Lagarde this morning underlined the hawkish shift taking place at the ECB. Making her opening comments at the bank’s Sintra Forum in Portugal, Lagarde warned that the ECB would be nimble in its policy approach.

The ECB chief said that while current plans are for a .25% hike in July, the ECB is willing to be more aggressive if needs be should inflation continue to run hotter. Commenting on the ECB’s monetary policy outlook, Lagarde said: “There are clearly conditions in which gradualism would not be appropriate. If, for example, we were to see higher inflation threatening to de-anchor inflation expectations, or signs of a more permanent loss of economic potential that limits resource availability, we would need to withdraw accommodation more promptly.”

With this in mind, upside risks into the coming ECB meeting have now risen and EUR looks likely to trend higher near-term. We also heard from ECB’s Kazaks today who said that “front-loading” hikes, such as raising by more than .25% next month, might be the better option for the ECB.

Where to Trade ECB Hawkishness?

EURJPY

With JPY under pressure amidst rising equities prices and the clear monetary policy divergence between the ECB and BOJ likely to create a platform for higher prices, EURJPY is a good vehicle for trading EUR strength.

Price is once again testing the 143.80 level highs following a solid rebound off the 137.74 level. With MACD and RSI bullish and with the retail market heavily short (roughly 75%), there is plenty of room for a further breakout here. Bulls can target 145.81 initially on a break of current highs.