Euro Gives Up Rally as Traders Say Lagarde Lacked Details

(Bloomberg) — The euro erased gains as traders criticized President Christine Lagarde for a lack of details on interest rates during the press conference, and doubts grew over the European Central Bank’s anti-fragmentation tool.

Most Read from Bloomberg

The common currency traded little changed at $1.0175, giving up an almost 1% advance earlier. The spread between 10-year Italian bonds and German equivalents widened by almost 25 basis points, nearing levels last seen during a market rout last month.

Policy makers raised the key rate by half a point to zero on Thursday, ending an era of negative interest rates in the region. Bets were almost evenly split between a quarter- and half-point increase before the outcome.

“She has not been able to explain or communicate clearly what they will do in terms of rates going forward,” said Roberto Cobo Garcia, head of G10 FX strategy at BBVA.

Money-market traders are wagering on 60 basis points of hikes at the ECB’s next meeting in September, compared with less than 50 basis points before the decision.

“The market is trying to force Lagarde into giving clear guidance on when they will use the tool and a stronger ‘whatever it takes’ commitment, whereas Lagarde still does not want to give too much away,” said Kaspar Hense, a portfolio manager at Bluebay Asset Management.

The repricing suggests investors expect the ECB will have to get more aggressive in order to deal with record-high inflation, which is running at more than four times its 2% target. The move comes despite a political crisis in Italy — one of the region’s most indebted economies — that has sent the nation’s markets into tailspin.

Story continues

Attention now turns to the European Central Bank’s new tool to stave off undue panic in government bond markets, named the Transmission Protection Instrument (TPI).

The tool will be “an addition to the Governing Council’s toolkit” to protect the transmission of monetary policy across the euro area, according to an ECB statement. Lagarde said that all euro area members are eligible.

(Adds Italy-Germany 10-year yield spread in second paragraph.)

Most Read from Bloomberg Businessweek

©2022 Bloomberg L.P.