The ECB’s HQ in Frankfurt © REUTERS

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Alarms and sirens will sound across Germany on Thursday morning to test its alert systems in the first national warning day — Warntag — in 30 years. 

Inside the European Central Bank headquarters in Frankfurt, meanwhile, alarm bells have been ringing for a while about the recent rise of the euro.

For the first time in more than two years, the ECB is expected to include a reference to the exchange rate in the “introductory statement” it publishes to present the results of its monetary policy meetings. 

Line chart of $ per €, showing how Europe's single currency has strengthened since this year

While its comment on the euro is likely to be bland, the wording will be closely scrutinised — especially as this week’s meeting is unlikely to produce big policy changes.

Christine Lagarde is tanned and relaxed after returning from a holiday in her native France. But with the eurozone economy still reeling from a record postwar recession, the ECB president has plenty on her plate. Here are the four big questions to watch for: 

  • How to talk down the euro? The euro has gained 13 per cent against the US dollar since March — making eurozone exports less competitive and dragging down inflation by lowering import prices. 

    As well as signalling that the ECB is monitoring the exchange rate in its introductory statement, Ms Lagarde is expected to be asked about the currency in her subsequent press conference. 

    She is likely to be cautious, not wanting to go further than ECB chief economist Philip Lane last week, when he said that although it does not set policy to target the exchange rate, “the euro-dollar rate does matter” and will “feed into our monetary policy setting”. Katharina Utermöhl, economist at Allianz, predicts Ms Lagarde will for now focus on “talking the talk to win some time” before “walking the walk in December” when she is expected to announce a €500bn increase in the ECB’s €1.35tn emergency bond-buying programme. 

    Watch for signals from Ms Lagarde that more easing measures are likely later this year and whether a further rate cut is possible.

  • What about deflation? The eurozone slid into deflation for the first time in four years in August, when consumer prices fell 0.2 per cent. That is a troubling sign for the ECB, which has already failed to hit its target for inflation to be just below 2 per cent for many years. The bout of deflation in August was partly due to one-offs, including delayed clothing sales in several countries and a cut to German value added tax. So the ECB may shrug it off.

    “The ECB usually looks through these short-term variations, and can afford to do so this time again,” said Florian Hense, economist at Berenberg.

    More worryingly, the stronger euro is expected to lead the ECB to lower its medium term inflation forecast even further away from its 2 per cent target — strengthening the case for more easing later this year. 

  • Follow the Fed? Two weeks ago, the US Federal Reserve announced a strategic shift to give more weight in its policy deliberations to the labour market and to accept that inflation could overshoot its 2 per cent target for a period after a period of missing it. As well as contributing to the dollar’s fall against the euro, this dovish shift by the Fed puts the pressure on the ECB and other central banks to do the same or risk their currencies continuing to appreciate. “The ECB is on the front line of these dynamics,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.

    Ms Lagarde kicked off a review of ECB strategy in January, but the pandemic put it on pause and it is not due to be completed until next year. Watch for any hints on whether she would like to follow the Fed’s lead.

  • How is the economy? The 11.8 per cent contraction in the eurozone economy between the first and second quarters set a new postwar record. Most economists expect a sharp rebound in the third quarter. 

    But the latest resurgence of coronavirus infections across Europe raises the prospect of fresh lockdowns, which hit confidence and growth even if they are local rather than national. Recent data indicate that the recovery is already running out of steam. Watch for any changes in the ECB’s updated growth forecasts, which will reflect how confident it is that the rebound remains on track.

martin.arnold@ft.com; @Mamdorsky

Chart du jour: Spain suffers

Spain’s infection rate is the highest in Europe. Chart showing 14-day cumulative number of Covid-19 cases per 100,000. Spain comes out on top with more than 250 cases per 100,000, nearly double France's rate

Spain’s rise in Covid-19 stands far and above the rest of Europe, with daily case numbers hitting 10,000 in recent weeks. The FT’s Daniel Dombey reports on why a combination of indoor gatherings, outdoor drinking and governance issues have contributed to the surge.

News round-up

© Reuters
  • The EU is considering the possibility of suing the UK at the European Court of Justice over the British government’s intention to break the terms of the Brexit withdrawal agreement. (FT) On Thursday, EU foresight commissioner Maros Sefcovic will travel to London to see counterpart Michael Gove for an extraordinary meeting of the joint committee, with Brussels demanding “clarification” on the status of the divorce agreement.

  • The European Commission wants to ramp up the EU’s emissions reduction target by “at least 55 per cent” in 2030. (FT)

  • A devastating fire at the overcrowded Moria refugee camp in Lesbos has left thousands of people homeless. (FT/NYT)

  • Donald Trump has been recommended for the Nobel Peace Price by a far-right Norwegian politician. (Politico)

Coming up on Thursday

Christine Lagarde takes questions from journalists at the ECB’s latest press conference this afternoon (14.30 CET).

In Brussels, the European Commission will deliver its assessment on how tech giants are complying with the voluntary “code of practice” on disinformation — including news related to Covid-19.

mehreen.khan@ft.com; @mehreenkhn

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