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EURUSD stumbled as BUBA chief Weidmann, a known hawk, announced resignation unexpectedly

calendar 20/10/2021 - 19:24 UTC

EURUSD stumbled from 1.16640 to a low around 1.16160 early Tuesday as BUBA chief Weidmann, a known policy hawk, announced his resignation quite unexpectedly. Weidmann will step down from the German Central Bank Bundesbank (BUBA) by Dec’21. Weidmann had asked German Federal President Steinmeier to dismiss him from office on 31st Dec’21. According to the Bundesbank’s press statement, Weidmann will leave ‘for personal reasons.

Weidmann issued an official statement, announcing his resignation:

In recent years, I have repeatedly addressed you personally. I would like to do so again today. The time, since I took over as President of the Bundesbank has been eventful. The environment in which we operate has changed massively and the Bundesbank's tasks have grown. The financial crisis, the sovereign debt crisis, and most recently the pandemic have led to decisions in politics and monetary policy that will have long-lasting effects.

It has always been important to me that the Bundesbank's clear, stability-oriented voice remains clearly audible. With a great deal of expertise, the departments have contributed to the discussions on the right lessons to be learned from the crisis and on the framework of the monetary union. Important regulatory changes have been adopted. The reorganization of banking supervision in Europe has not only led to completely new supervisory structures at the ECB but also to a strengthened role for the Bundesbank. The Bundesbank's new responsibilities in the area of financial stability also underline our central role when it comes to a functioning financial system.

Monetary policy has played a significant, stabilizing role throughout this period. However, the numerous emergency monetary policy measures were also associated with considerable side effects, and in the ongoing crisis mode; the coordinate system of monetary policy was shifted.

My colleagues in the Governing Council under the leadership of Christine Lagarde deserve thanks for the open and constructive atmosphere in the sometimes difficult discussions of the past years. Despite the strains caused by the pandemic, we managed to bring the strategy review as an important milestone in European monetary policy to a successful conclusion. As the Bundesbank, we confidently contributed with our analytical competence as well as our core convictions to the review process. A symmetrical, clearer inflation target has been agreed. Side effects and, in particular, financial stability risks are to be given greater attention. A targeted overshooting of the inflation rate was rejected. And the Eurosystem will pay more attention to climate risks in the future. These are all points that were important to me.

As is so often the case, it now depends on how this strategy is "lived" through concrete monetary policy decisions. In this context, it will be crucial not to look one-sidedly at deflationary risks, but not to lose sight of prospective inflationary dangers either. And crisis measures with their extraordinary flexibility are only proportionate in the emergency situation for which they were created. A stability-oriented monetary policy will only be possible in the long run if the framework of the monetary union ensures the unity of action and liability; monetary policy respects its narrow mandate and does not get caught in the wake of fiscal policy or the financial markets. This remains my firm personal conviction, as does the high importance of the independence of monetary policy.

At the same time, the Bank has transformed itself internally. Together, we have created a culture of openness in which we treat each other with esteem and respect, regardless of whether we work at the head office, the regional offices, or the branches. All my colleagues on the Executive Board have helped to shape this path, and I would like to express my special thanks to them. It has always been important to me that we perceive ourselves as "one bank", which can only carry out its important tasks well if all parts contribute their share and are heard. And I believe we have made good progress in this respect.

Our public relations work has also changed: in recent years, the Bundesbank has presented itself as a transparent, accessible, and, above all, competent institution that people can trust. This has been demonstrated by the "open days" and by the numerous other public events. Through the digitalization initiative and the work of KADi, the Bank has become more agile and flexible at the same time, and not only here, but we also work better together across departments. Other projects were only started and pre-shadowed during this time, but not completed. This applies to the new campus and the "new working environments" as well as to the digital euro project.

I am writing all this to you because I am convinced that together we have achieved a lot in the past years, and I would like to thank you for it. Thank you for supporting the Bank's transformation towards more openness and appreciative cooperation. Thank you for contributing your expertise, your ideas, and your lifetime to our internal discussions, the committee works in the Eurosystem and the public image of the Bank -- even under the difficult conditions of the pandemic.

Overall these years, it has been an honor and a matter close to my heart to represent the Bundesbank as an institution - and thus all of you - and to shape the Bank's positions together with you in the interest of a stable currency, a stable financial system, stable payment systems and a secure cash supply. I know of no other institution where so much expertise meets so much commitment to the manifold important public tasks.

This makes the decision to ask the Federal President for my release from office on 31 December 2021 all the more difficult. But I have come to the conclusion that more than 10 years is a good measure of time to turn over a new leaf - for the Bundesbank, but also for me personally.

I wish you continued determination, fortune, but also satisfaction in your important tasks. Remain an audible voice of reason in public discussions and preserve the Bundesbank's important stability policy legacy, which makes this institution so unique. At the same time, I hope that you will remain fond of me and try to understand my decision.

Overall, Weidmann pointed out ECB’s perpetual policy of lower for longer (perpetual ZIRP) and the focus on perpetual financing of structural fiscal deficits at the lowest borrowing costs for many fragile EU member states. Weidmann, a known policy hawk also raised this issue of low-cost financing of Euro debt almost perpetually by the ECB at the expense of price stability. The ECB should make its policy on a neutral basis as a Central Bank institution, not under any political or market influence. The ECB is set to replace PEPP with some other instrument or even with recalibrated never-ending APP. The ECB has no plan to hike/normalize till at least 2025.

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Now talking about inflation, final EUROSTAT data shows that the Eurozone annual inflation rate was confirmed at +3.4% in September, the highest in 13-years (Sep’08 GFC) against August print +3.0% (y/y). On a sequential basis, the Eurozone CPI increased +0.47% in September and the average sequential rate so far in 2021 is around +0.334%, translating to an annualized rate of almost +4.0%, double than ECB’s target +2.0%. In September, the Eurozone CPI was mainly boosted by surging energy, food and also services (after reopening).

The Eurozone core inflation, which excludes volatile energy, food, alcohol & tobacco jumped +1.9%, the highest rate since Dec’08 and officially just below ECB’s target of +2.0% (y/y). On a sequential basis, the core CPI jumped +0.52% and the average sequential rate is +0.27%, translating an annualized rate +3.25%, much above ECB’s target.

At a glance, the Eurozone CPI or core CPI index data is abnormally volatile and surprisingly took an abnormal downward turn from December to January each year, which is causing a lower y/y rate and always far below ECB’s target of +2.0%. If we consider the core CPI index on a 12-month basis (like Fed does); i.e. from Jan to Dec, the Eurozone core inflation was around +2.84% in 2019, +1.96% in 2020 and +3.25% so far in 2021 (on an annualized basis).

Eurozone core CPI index

Eurozone unemployment rate

Whatever may be the inflation narrative, ECB needs to support fiscal stimulus/deficit spending of many fragile EU states by ensuring the lowest borrowing costs, so that the Eurozone double-digit unemployment comes down to 7.5% in September, at pre-COVID levels, thanks to Germany (3.6%) and Netherlands (3.2%). But the unemployment rate is still high in Spain (14%), Italy (9.3%) and even France (8%). And thus ECB has no option, but to continue its ultra-accommodative monetary policy as long as possible to support these fragile EU member states and for the interest of EU unity/cohesion.

Bottom line:

The BUBA President Weidmann is against such perpetual ultra-accommodative monetary policy by the ECB to support some fragile EU member states at the expense of German taxpayers. Now after Markel, Weidmann may not find his support from the next Chancellor Scholz of SPD, who is also quite liberal and a policy dove (socialistic thinking). Thus Weidmann may have resigned so that Scholz will be free to pick his candidate for the BUBA President and represent to the ECB from Germany. The exit of a known hawk Weidmann from ECB may result in more dovishness in the coming days. Thus EURUSD stumbled Wednesday.

Technically, whatever may be the narrative EURUSD now has to sustain over 1.16700-1.17100 zones for a further upward move towards 1.17600-1.19100 areas; otherwise, it will fall again towards 1.14200 and even 1.07400 zones if oil surged above $85 and goes towards $100. EUR is an oil import savvy currency and thus higher oil is negatively affecting it; the same is also true for the Japanese Yen (JPY).

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