The euro, which had initially failed to react much, ultimately slipped a quarter of a cent against the dollar on perceptions that further rate cuts were very much in the pipeline. Eurozone government bond yields also fell, especially shorter-dated ones which are more sensitive to the outlook for ECB rates. The yield on Italy’s benchmark two-year note hit a six-month low of 3.09 percent.
Trade war risks flagged
At a time when the EU is facing the risk of a trade war on two fronts next year with the U.S. and China, Lagarde took two opportunities to flag risks to the export sector, habitually an important engine of growth for the region.
According to ECB data, eurozone exports in the first quarter of this year were down over 4 percent from a year ago, against a backdrop of slowing demand in the U.S. and the long-term impacts on energy-intensive manufacturing from the loss of cheap Russian natural gas.
Aside from those factors, Lagarde also hinted at unhappiness with the way that China has grabbed market share from Europe as it has sought to export its way out of its own economic slump, caused by the deflation of a property bubble. The yuan has devalued by some 13 percent against the euro in the last two years, sharpening China’s competitive edge on world markets.
Exports are “a domain that we will also be looking very carefully at, to see how the numbers are faring going forward,” Lagarde said, with a close eye on “the competitive position of the European Union and the euro area relative to other economic nations — in particular, China.”
No promises
Lagarde took pains not to promise any fresh easing of monetary policy, having been embarrassed in June by a string of economic data that barely justified the Bank’s first interest rate cut since the pandemic. Instead, she stressed the Bank’s determination to keep “a data-dependent and meeting-by-meeting approach”, and said the outcome of its next meeting in September was “wide open” — even though financial markets are all but certain of a second quarter-point cut.
