Lagarde: Eurozone heading for growth despite Ukraine war

The euro zone economy is still set for robust growth this year, even if war in Ukraine is going to be a drag via high commodity prices, European Central Bank President Christine Lagarde said on Tuesday.

“If the baseline scenario of the staff projections materializes, the economy should still grow robustly in 2022,” Lagarde said a speech that largely repeated the bank’s policy stance following last Thursday’s Governing Council meeting.

While other growth scenarios are also possible, inflation is still expected to decrease progressively and settle at around the ECB’s 2% target in 2024, she added.

European Central Bank President Christine Lagarde said on Tuesday that the Ukraine crisis would lower growth but raise inflation this year, though the economy is still set for a robust expansion in 2022 while price growth will decrease toward the 2% target in 2024.

That could lead to less ECB inflation fighting compared to the Fed, with EUR/USD likely to suffer as a result.

EUR/USD was flat and well off its 1.1020 EBS high. The relief rally from March’s lows was aided by oil and natural gas prices tumbling from astronomical levels toward pre-invasion levels, leaving less room to weaken. EUR/USD’s 2020’s 1.0636 pandemic crisis low remains in play once recent oversold conditions have been worked off.

On Wednesday, investors will scrutinize US retail sales along with the Fed’s economic and rates projections, as well as Chair Jerome Powell’s post-meeting comments to assess the potential for further monetary policy divergence from the ECB.

Sterling was up 0.2%, finding trend low buyers by 1.3000 for a second straight day. The rebound in US stocks helped the risk-sensitive and oversold pair find its footing.

Sterling was also supported by speculation the BoE on Thursday could surprise with an unexpectedly bold 50bp rate hike, given the close vote at the last meeting and upbeat UK data.

USD/JPY was up 0.07% after an early pullback from Wednesday’s technically important 118.45 high, with prices tracking the pullbacks and then rebounds in Treasury yields and stocks during the session.

USD/JPY has already hit the 118.42 Fibo target from the April-July 2021 base and is close to 2017 and December 2016’s highs at 118.60/66, with prices thoroughly overbought and ripe for a retracement if Wednesday’s US event risks fail to force a further advance.

High-beta currencies were mixed and USD/CNH fell from early gains after hitting downtrend line resistance and October 2021’s highs and on a WSJ report that Saudi Arabia is considering accepting yuan instead of USD for Chinese oil sales.

Key Quotes
Inflation is still expected to decrease progressively and settled at levels around our 2% inflation target in 2024

Uncertainty around the outlook has increased significantly

Economy should still grow robustly in 2022

If the incoming data support expectation that the medium-term inflation outlook will not weaken even after the end of net purchases, we will conclude net purchases in the third quarter

War would lower growth and raise inflation via higher energy and commodity prices