Mon, Mar 01, 2021 @ 00:44 GMT
Home Action Insight Central Bank Views ECB Preview - Awaiting More Comments of Strong Euro

ECB Preview – Awaiting More Comments of Strong Euro

While ECB would likely leave its monetary policy measures unchanged this week, the market should focus on several issues: members’ view on recent euro strength, discussions on QE tapering and economic impacts of renewed lockdown. Following the recalibration in December, ECB would leave the size of the Pandemic Emergency Purchase Program (PEPP) at 1850B euro and that of the Asset Purchase Program (APP), its traditional QE program, 20B euro/ month. The deposit rate will also stay unchanged at -0.5%.

EURUSD soared +9%, while the trade-weighted euro index was up +4.7%, in 2020. Last week, Governing Council member and Bank of France Head Francois Villeroy de Galhau warned that ECB is “closely following the negative effects on inflation of the euro”. Meanwhile, ECB President Christine Lagarde indicated that the central bank is “extremely attentive” to the currency’s impact on prices. Yet, she added that, while the members would “monitor [FX movement] very carefully”, the do “not target it”. In fact, the December meeting minutes also revealed that members raised concerns that persistent strength in the euro could negatively impact the inflation outlook. As noted in the minutes, “it was pointed out that the nominal effective exchange rate currently stood at an all-time high and that the recent appreciation could contribute significantly to the subdued inflation outlook”.

US dollar rebounded last week amidst talks of Fed’s QE tapering. As Dallas Federal Reserve President Robert Kaplan suggested, the Fed should “at least be having an earnest discussion about when it’s appropriate to taper” later this year. While his comments were quickly watered down by other members (e.g.: Fed Governor Lael Brainard and St. Louis Federal Reserve President James Bullard), the market has started to pay attention to other central bank on this issue. The ECB extended the PEPP size in December. However, the minutes revealed that members were divergent over the move. Indeed, come members proposed to increase the size by less than 500B euro as “significant space for purchases was still available from past decisions and that in an environment of high uncertainty it was worth ‘keeping some powder dry”. It would premature for the ECB to discuss about tapering in January, only a month following the extension.

On economic developments, we expect ECB to remain cautious and warn of the negative economic impacts of the renewed lockdown. It is likely to bring a worse GDP contraction in 1Q21. However, vaccines should continue to bring some hopes to the recovery later in the year.

Featured Analysis

Learn Forex Trading