ECB Preview: Lagarde may try to talk down the euro providing a buy-the-dip opportunity

The European Central Bank (ECB) is set to leave its policy unchanged in January. President Christine Lagarde may trigger a “buy the dip” opportunity by trying to talk down the euro as unless the bank threatens lower rates, EUR/USD is set to resume its rises, based on dollar weakness, FXStreet’s Analyst Yohay Elam reports.

Key quotes

“The only tool that the ECB can deploy to hit the euro is cutting its deposit rate – which is already at -0.50%. Further punishing banks for parking money with the bank would be hard.”

“The ECB is unlikely to announce new measures at its first meeting of 2021. However, Lagarde may dedicate more time and use starker language to warn about the damage of the high exchange rate to the economy and to inflation. Investors may be taken aback and algorithms may shoot sell orders, pushing EUR/USD lower in response to the new language. Nevertheless, without slashing borrowing costs, markets may realize that Lagarde's threats are not credible, and return to trading the pair to the tune of moves across the pond.”