The euro has extended its decline to 90 pips as it ran stops below the May 31 low to the worst levels in two weeks.
Many market watchers have been far too focused on interest rate differentials and central banks and not on growth dynamics and sovereign debt.
The bull case for the euro was narrowing differentials versus the US dollar but that's not enough to turn the euro. The US economy can withstand Fed rate hikes while the eurozone economy will limp even without ECB rate hikes.
Moreover, by slow-rolling rate hikes now, Lagarde risks a situation where she has to hike more down the road as inflation remains sticky.
Ultimately though, I think this move is about the 'fragmentation' the ECB is so worried about. The end of ECB QE means far less support for periphery sovereigns and the 15 bps rise in Italian 10s has the market spooked today.
The ECB is clearly readying some kind of de-fragmentation pool but the market is sensing that it won't be enough.
