Market Overview

23 April 2021

ECB Disappointed Euro Optimists

The European Central bank (ECB) has spoiled the rally in Euro as investors bet ECB may hint on tightening of the monetary policy on its meeting April 22. But the European monetary policymakers stood still leaving even quantitative easing programs unchanged.

The rally in the Euro from 1.17000 to 1.20800 may be attributed to large extent with rising vaccination, positive expectation of rising business activity and economic growth in Europe. So, investors expected ECB to at least signal of the terms of its exiting strategy of monetary tightening after other large central banks made a move towards it. Bank of Canada recently scaled back its purchases of government debt by a quarter to C$3 billion ($2.4 billion) and accelerated the timetable for a possible interest-rate increase from 2023 to the second half of 2022. Even the U.S. Federal Reserve has mitigated it rock-solid position after its Chair Jerome Powell said the Fed will limit any overshoot of inflation above 2%. "We do not seek inflation that substantially exceeds 2 percent, nor do we seek inflation above 2 percent for a prolonged period," Powell said in a response to a U.S. Senator Rick Scott letter concerning rising inflation and the U.S. central bank's bond-buying program.

U.S. CPI index jumped to 2.6% in March from 1.7% recorded in February, and far above the target of 2%. Although the Fed is targeting core CPI, which rose just to 1.6% year-on-year in March, inflation will remain a major concern for the market. It is clear that monetary and fiscal stimulus measures together boost inflation much faster and higher than was expected. In such circumstances investors await ultra-lose monetary policy to end sooner than previously outlined 2023.

Similar signals were expected from the ECB. However, the European central bankers left not only interest rates unchanged, but also indicated in their statement that they are not planning to change ECB's massive quantitative easing programs such as PEPP until 2023. ECB’s Chairwoman Christine Lagarde on the press-conference said there hadn’t been discussions so far on a possible phasing out of stimulus, as it was “simply premature.” She also said that the negative rates policy was "effectively supporting the economy" by keeping lending rates low and encouraging businesses to invest and households to borrow. ECB indicated that it would not wind down its lose monetary policy earlier even of the Fed would do so. Such a dovish rhetoric could be egged on by the recent rally in the EURUSD over 1.20000 vs the U.S. Dollar that had possibly made the Euro too strong in the eyes of the ECB.

If ECB and the Fed would continue to follow their own different paths “euro bulls” may suffer. The rise of the Euro above 1.21000 might be extremely difficult. On the other hand, a short-term breakthrough the 1.19800 level and further slide to 1.1900 may be seen as a possible scenario.

 

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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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