After the ECB policy decision yesterday and Lagarde's presser, markets interpreted the ECB as being more on the dovish side. We saw rates tumble and the euro also dropped as the dollar came back into favour. So, what were the key trigger points?
I think the first one was when Lagarde mentioned that the risks to the inflation outlook is seen as being "more balanced" now. While she stopped short of following Powell in calling it "disinflationary", this was also a big step away from their previous tone on the inflation outlook. Check one.
The second to me was the lack of firmness and clarity by Lagarde in laying out what comes next after the March meeting. The statement committed to a 50 bps rate hike then but was no certainty about what comes after with the passage reading that policymakers "will then evaluate the subsequent path of its monetary policy".
Does that mean a pause or a stop to the tightening cycle? That is also something which Lagarde did not outright rule out and that bit of uncertainty is enough to seed doubt in markets about their conviction.
After that, we did get the usual ECB sources report to try and clear up the air but the damage was already done. Quite frankly, I would not be surprised if we get one or two more of those in the coming day or next week.
To sum up, I reckon there is a case of misconception here after ECB policymakers sounded the hawkish horn over the past few weeks and then suddenly to see Lagarde be less firm in the messaging today. It should have been a straightforward one but the slight changes in the language and communication were enough for broader markets to feed on, especially after the more dovish tone put out by the Fed and then BOE beforehand.
At this stage, central banks are moving towards being more reliant on upcoming data and that means markets will likely take the lead. I highlighted it being the case for the Fed here and it looks like it is going to apply to the ECB as well after March.
