We have had the ECB meeting today and in our view the ECB confirming a significantly increased pace in terms of the pandemic purchase program is bearish in our view. A summary of the meeting below, the big fundamentals and the key technical levels to look out for in EUR/USD.
The ECB voted to leave interest rates unchanged at record lows at today’s meeting which was totally expected by the market and they also pledged to continue to buy up government bonds through the €1.85trn pandemic emergency purchase programme (PEPP) at the current faster pace to try and support the recovery.
“Since the incoming information confirmed the joint assessment of financing conditions and the inflation outlook carried out at the March monetary policy meeting, the Governing Council expects purchases under the PEPP over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year.” (ECB)
The ECB also note that it would adjust its purchases, as required, to counter the economic problems caused by Covid-19: “The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy.
The statement continues: “If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.”
The overall tone was not hawkish and confirming a significantly increased pace in terms of the pandemic purchase program is bearish in our view – coming into the meeting many economists were looking for it to be cut back – chart below:
In terms of the big picture its euro bearish and we agree with this quote: “The near-term outlook for the eurozone remains weak given the tight grip of the third infection wave, and despite the recent pick-up in the vaccination pace. (Oliver Rakau Oxford Economics.) who predicted the ECB would continue to buy bonds at an accelerated rate up until September against the majority view – the view of the majority that the EU is on the road to recovery is not supported by facts in our view and the ECB see the dangers ahead:
In terms of the US economy its doing better than the EU and this gap is likely to widen: “We think that the fast rate of vaccination, falling virus case numbers and an earlier lifting of restrictions in the US will continue to put greater upward pressure on government bond yields there than in the euro-zone. The ECB has expressed a greater willingness than the FED to push back on rising government bond yields.” (Capital Economics) We are euro bearish and expect a sell off after the recent rally…
Technical Analysis EUR/USD
We have seen a strong rise in the EUR but in the last four days we have seen low volatility as we stall below the 1.2100 level. Today’s spike higher has failed to reach the 1.2100 level and previous spike high of the week. We think the buying is now exhausted and sell a break of nearby support with a stop back from the key 1.2100 level.
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