The euro continued to rise on Thursday, despite Christine Lagarde's warning that the ECB is closely monitoring the exchange rate. The European currency has appreciated by more than 8% against the dollar since the beginning of 2020.

The euro continued to rise on Thursday, despite the new monetary support measures announced by the ECB and the words of President Christine Lagarde, who expressed concern about the high level of the European currency, which could be an obstacle to economic recovery.

On Thursday evening, the euro gained 0.5% to $ 1.2142, the highest since April 2018. The single European currency had crossed the psychological threshold of $ 1.20 on December 1 for the first time in more than two and a half years. Since the beginning of the year, the euro has appreciated by 8.2% against the greenback, the latter having accelerated its fall since the beginning of November (-3%) in anticipation of an economic recovery in 2021.

The dollar index, which measures the evolution of the greenback against a basket of 6 reference currencies (euro, yen, pound sterling, Swiss franc, Canadian dollar, Swedish krona) fell Thursday night by 0.36% to 90.76 points.

Pandemic emergency programme increased by €500 billion

Despite their large scope, the measures announced Thursday by the ECB did not surprise the markets, which had largely anticipated these announcements. The European Central Bank has announced an increase of 500 billion euros in its pandemic emergency purchase programme (PEPP) from 1,350 to 1,850 billion euros.

The duration of this programme has also been extended by 9 months, until the end of 2021. The ECB will also continue its TLTRO (loans to banks at negative rates) programmes until the end of 2021 as well.

ECB President Christine Lagarde also called on European states to provide more budgetary support, at a time when a two-day European summit is opening, dedicated in particular to the future European support plan of 750 billion euros against Covid-19.

The exchange rate will be monitored "very carefully"

Regarding the high level of the euro, the ECB President warned that the ecb would continue to monitor the exchange rate. "We are following exchange rate developments very carefully," she said after a meeting of the Governing Council. "We will also continue to monitor changes in the rate. exchange rate in terms of its possible implications for medium-term inflation forecasts."

These remarks were therefore not enough to calm the rise of the euro that began several weeks ago, while the dollar has on the contrary depreciated sharply as investors anticipate an economic recovery in the United States in 2021, thanks to the future vaccination campaign against Covid-19. The election of Joe Biden on November 3, but without a Democratic "blue wave" in Congress, is judged favorably by the financial markets.

In addition to its negative effects on the competitiveness of euro area exporting companies, a strong euro contributes to low inflation, which is expected to remain "probably negative until the beginning of 2021" in the euro area, according to the ECB boss. demand, especially in tourism and travel-related sectors, as well as pressure on wages and the appreciation of the euro exchange rate," she stressed.

Inflation is now estimated by the ECB at 0.2% in 2020 against +0.3% previously. It should then accelerate to 1% next year and 1.1% in 2022. But at 1.4% expected for 2023, the price increase would remain far from the 2% target.

2021 growth revised down due to the 2nd wave of Covid-19

Regarding the economic outlook for the euro area, the ECB has revised down its forecasts for 2021, before an acceleration in 2022. Christine Lagarde said that "the risks surrounding the growth prospect in the euro zone remain tilted to the downside, but they have become less pronounced", thanks to the hopes born of the vaccines against the coronavirus.

She estimated that the eurozone economy was likely to contract again in Q4, after its Q3 rebound, due to the 2nd wave of coronavirus that will continue to affect the economy in early 2021. For 2020 as a whole, the ECB expects GDP to fall by 7.3% (from -8% previously), followed by a revised rebound to +3.9% in 2021 (against +5% previously), then an increase of 4.2% in 2022 (against +3.2% previously).

"We had all anticipated that there would be a second wave but its depth and duration as well as the associated containment measures were not anticipated at the level observed," commented the ECB President.