Market Overview

During its meeting on Thursday the European Central Bank (ECB)  trumpeted a more hawkish tune when revealing its monetary policy perspectives. The ECB plans to reduce its bond-buying program under APP to 30 billion Euros in May and to 20 billion Euros in June from the current 40 billion Euros a month. The program itself is planned to be terminated somewhere during Q3 2022.

By declaring this the ECB has joined the approach of other major central banks that have already lifted interest rates, but without actually doing so. It would be perceived as a clear sign from European policymakers that the ECB will begin reducing its monetary stimulus.

It is worth noting that the ECB has less opportunities to tighten monetary policy as the European economy is suffering from the military conflict between Russia and Ukraine, soaring costs of fuel and other resources. Such negative conditions hinder the ECB from being stricter when  scaling back its quantitative easing programs. However, blistering inflation has forced monetary policymakers to turn hawkish, partially sacrificing economic growth.

Thus, the initial reaction of the market to the ECB’s statement was quite the opposite of the usual response to monetary tightening. The Euro dropped to 1.07500 to the Dollar, rebounding slightly to 1.08000 later in the day. The perspectives of the recession in the Eurozone accompanied by inflation are not seen to be inspiring investors. The Federal Reserve (Fed), in contrary, has a more forceful policy as it is set to raise the interest rate by 50 basis points to 1.00% in May.

Consequently, the misbalances between the monetary policy of the ECB and the Fed may be preserved or it may even seesaw down after the ECB’s actions. This discrepancy along with the weaker economic perspectives of the Eurozone may push the EURUSD lower. After a consolidation, the Euro may tumble to 1.07000 and go even deeper.

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