Market Talk: Why Lagarde's exit changes little for the ECB

ECB President Lagarde resigns while the Fed plays for time. Before the dust settled on the Fed's latest decision, a seismic shift at the ECB has already stolen their thunder. Christine Lagarde has announced she plans to leave in early 2027, setting the stage for a succession contest at one of the world's most powerful central banks. So, a new chapter for the ECB, or just a changing of the guard? Let's ask Jane Foley, head of FX Strategy at Rabobank. So Jane, Lagarde's departure has widely been anticipated. So, does the formal announcement change anything for markets? Have we seen any meaningful reaction in the euro? Well, it will change insofar as it will just heat up the speculation about who will be that successor. But as you mentioned, this has been going on for quite some time. And in fact, some commentators, of course, have picked up that Lagarde's book will be published early in the new year and therefore that her departure was going to be relatively imminent. But what we need to know now is whether or not she will be replaced by Hawke or for a Dove. And it's got to be said that the market is still quite hawkish in its pricing for ECB interest rate moves over the Next year, suggesting perhaps if we were to get a dove, there's going to be a little bit more impact on the euro. Well, let's talk about some of the potentials named here. Spain's Pablo Hernandez de Cause, as well as the Netherlands' Klasnot, are among the contenders to succeed Lagarde. So will markets favour one over the other? Will it really shift future policy direction? I think it will only shift the impact of all the anticipation of what could happen in the immediate term, you know, so in the next six months, in the next year. But I think all of these candidates are established. They're well known. They're credible. And so from that point, From my point of view, I don't think we're going to see a significant shift. I think it really is European politics and the French presidential election that are going to be much more dominant effects into the new year than the new leader of the ECB. Nevertheless, the market will still want to know whether or not a new leader brings different communication challenges, for instance, or different styles. So there's plenty to speculate on, plenty to anticipate. But I don't think that we're going to have a fundamental shift. I think this is more of a changing of the guard. Well, let's look back to the Fed. Now, it held rates steady as expected, but Walsh was pressed on the obvious question. Why not cut now? He didn't offer much of an answer. So what's really keeping the Fed on hold? Well, of course, you know, that speculation suggests, is it to do with the elections? Now, I think perhaps we don't have enough evidence to come to that conclusion. But some commentators do suggest that perhaps Walsh... wasn't as hawkish as he could have been, given that inflation data are likely to suggest that inflation remains a significant risk. Nevertheless, the market's fairly comfortable with the view that the Fed will be hiking in December. I think if they don't do that, there could be a credibility challenge. But I think for now, I certainly would give Walsh the benefit of the doubt and suggest that since the start of his tenure at the Fed, he has illustrated a desire to get inflation Back on track. Well, as you said, expectations of a December rates hike are pretty priced in now, yet futures markets pared back bets for next year, so what's driving that more dovish shift? Does it change your outlook for the dollar? Well, indeed, I think we can actually look at a number of central banks. I think we can look at the ECB. I think we can look at the Bank of England and suggest that actually the money market has priced in a very hawkish trajectory for all of those. We've got to bear in mind that there are growth headwinds. For instance, in Europe, there are energy expectations or energy prices are likely to push higher, dragging down on growth. And so I think for a number of central banks, I would be in the camp that would suggest Finally, Jane, the Bank of Japan is widely expected to hold rates overnight while signalling that underlying inflation has finally reached its 2% target. So what should yen watchers be listening for? Well, you know, I am of the view that the yen could strengthen into the new year. Yes, we've got a Bank of Japan that's quite cautious, has been quite cautious in tightening policy. But those moves are there and they're quite progressive. The economy also has been pretty resilient. And if that can sustain, I think we will get more confidence in the yen going forward. But in addition to that, I think the market needs to take another look at the fiscal dynamics in Japan. It's been very concerned about the level of debt, about the inflationary policies. of the Prime Minister, but actually in terms of the primary deficit of Japan, perhaps it's not as bad as most of the rest of the G7. And of course, a lot of that debt in Japan is owned domestically, which offers some protection to the yen. So I think we will get confidence creeping back into the yen into the new year. And I think another interest rate hike in December will be part of that story. That was Jane Foley from Rabobank. Don't forget you can watch more videos on Reuters.com.