ECB weighs chance to ‘talk down’ the euro

With the ECB’s deposit rate already at minus 0.5pc, he sees a “high hurdle for policy action (such as a rate cut) to limit the euro strength at this point. But we do see scope for further ECB communication on the euro to slow a further rise”.

So how could the ECB “talk down” the euro?

It all comes down to careful presentation.

“While the ECB does not really have any effective policy options in its tool kit to stem euro appreciation in the near term, there is a case for continued verbal intervention, possibly in both the ‘introductory statement’ and the press conference” at Thursday’s announcement, says Spyros Andreopoulos at BNP Paribas.

“For this pushback to be credible, the overall tone of the Council’s September communication… should remain cautious. This element could be underscored by comments on the impact the exchange rate has on the inflation outlook.”

Analysis by Shinya Harui at Nomura indicates that the ECB typically begins by mentioning its traditional policy on exchange rates, before moving on to “monitoring” the currency, then eventually implying that it is the rationale for a policy change, for instance by warning it imperils the goal of price stability.

Even if the central bank guides the market to expect long-term low interest rates, Harui warns it will be “difficult to change the euro’s upward trend” because “the market is already pricing in the risk of rate cuts down the line” and the changes in the currency are driven in part by changes in the global economy.