EUR/USD: Ms. Lagarde to quit before the end of her mandate

With the Financial Times suggesting that Ms. Lagarde may leave the ECB presidency before the end of her term, and the highly probable appointment of Kevin Warsh as Fed chairman reshuffles the deck, currency traders must look ahead.

"The potential appointment of Kevin Warsh marks a major intellectual shift in monetary policy thinking. Traditionally identified as a proponent of fiscal discipline, he is now proposing an innovative approach: viewing artificial intelligence as a structural engine of productivity capable of containing inflation without systematically resorting to interest rate hikes," says Thomas Jaquet, Director of Freedom24, taking a step back.

"The central idea is simple yet ambitious: if AI can significantly increase productivity and reduce unit production costs, then the potential growth of the US economy could increase without generating sustained inflationary pressures. Monetary policy would no longer rely solely on moderating demand, but on a deliberate bet on supply and technological progress."

Regarding Ms. Lagarde's likely departure before the end of her term, and even before the next French presidential election (May 2027), the FT broke the story. According to the financial newspaper, "Christine Lagarde could leave the presidency of the ECB before the end of her term in order to be replaced before the French presidential elections. The implicit objective would be to safeguard the institution against the risk of a victory for the National Rally (RN). The ECB has, however, denied any decision at this stage," report economists at Nomura, who reacted as follows:

"Several key mandates on the Executive Board expire in the second half of 2027, notably those of Lagarde, Lane, and Schnabel. Some member states are reportedly considering accelerating decisions to avoid them occurring after the French presidential election. Potential successors include Knot, de Cos, Nagel, and Schnabel, with de Cos perceived as having a slight edge according to Nomura, while the consensus leans more towards Knot."

"The impact on monetary policy would be very limited. HICP inflation is expected to be close to 2% and growth around 0.3% per quarter." Nomura anticipates that interest rates will remain unchanged this year and likely next year, reflecting the collegial and consensus-based approach of the ECB.

Tuesday's trading session was driven by the release of the ZEW index of confidence in the German economy. This solid score corroborates the latest encouraging macroeconomic data regarding the recovery of the Eurozone's largest economy. Nevertheless, at 58.2, it has contracted slightly compared to the previous month, and, more importantly, it fell short of expectations by 7.4 points.

"The ZEW indicator remains stable. The German economy has entered a phase of recovery, albeit a fragile one. Considerable structural challenges persist, particularly for industry and private investment." "The impending reforms to the social security system should significantly enhance Germany's attractiveness as a business destination," comments Professor Achim Wambach, President of the ZEW, regarding the results of the current survey.

The very positive surprise of the Sentix Eurozone investor confidence index, published last week and exceeding expectations, is largely attributable to the German component.

Economists at Swiss Life AM provide context: "The outlook will largely depend on fiscal expansion, although its implementation, speed, and effectiveness remain uncertain. Spending from the special budget increased significantly in 2025 and is expected to continue rising in 2026. Furthermore, the differences between actual and planned spending reflect a mixed picture."

"In transport infrastructure, existing resources were quickly utilized because projects were already in place and maintenance was a priority." But in more complex sectors (energy infrastructure, research, and digitalization), commitments were significantly lower than forecast, indicating higher requirements in terms of concepts, permits, and coordination. The budgetary impetus for these structurally important investments therefore largely depends on their execution. The key here is not the deficit trajectory, but efficient and coordinated execution to quickly fill order books and kickstart production.

On the macroeconomic agenda today, the key events to watch are: the federal industry report at 15:15 (EU time), and the Fed minutes at 20:00.

Right now, the EUR/USD is trading at $1.1831.