ECB: Can verbal intervention be effective to cap the strength of EUR? - ING

Beyond cutting its inflation forecasts, the ECB could also start considering its verbal intervention options to cap the strength of EUR, according to analysts at ING. 

Key Quotes

“References have been made to the adjectives, ‘brutal’, ‘sharp’ and ‘abrupt’ that former ECB President Trichet used through 2004 and then again in 2007 in an effort to slow the EUR/USD advance. Yet those remarks from Trichet barely put a dent in the 2002-2008 EUR/USD bull trend – with the largest correction actually seen in 2005, when George Bush’s Homeland Invest Act finally encouraged the repatriation of US$300bn+ into the US tax system.”

“We think comparisons with 2004 are quite apt at this point. Back in September 2003, the US Treasury had hijacked the G7 Communique and in an effort to force China (and Japan) to allow their currencies to strengthen had crafted a phrase: ‘more flexibility in FX rates is desirable for major countries’. This was targeted at China, but the market took the dollar lower across the board.”

“Fast forward to 2017 – there has been no Communique, but there is a suspicion that a surge in hawkishness in June from the ECB, the Bank of England and the Bank of Canada might have been coordinated to stop the dollar appreciating after the June Fed hike. It is probably no surprise that Washington would like a weaker dollar now and the problem for the ECB will again be trying to slow a EUR/USD advance which is increasingly being driven by the dollar.”