Wed, Jun 23, 2021 @ 10:41 GMT
HomeContributorsFundamental AnalysisECB Preview: Christine Lagarde Will Have To Kick The Can Down The...

ECB Preview: Christine Lagarde Will Have To Kick The Can Down The Tightrope

The ECB last met on March 11th. At that time, EUR/USD was trading near 1.1950 and German Bund yields were trading near-0.35. The outlook was bright, maybe too bright, as forecasts were revised for growth and inflation. Many countries were under restrictions and lockdowns at the time, and all eyes were on the increase in yields, with some suggesting that the value of the Euro was too high as well. The conclusion at the March 11th meeting was that the ECB would increase the pace of their bond purchases under the Pandemic Emergency Purchase Program (PEPP), which did lower yields and the Euro, but only for a short time.

German Bunds

Three days before the April 22nd ECB meeting, EUR/USD is trading above 1.2000 and the Bunds are trading near -0.235, both higher than March 11th. The vaccine rollout continues to be slow, with some countries pausing the AstraZeneca and Johnson and Johnson vaccines due to possible blood clotting. Many economic indicators in Europe are still weak, sans manufacturing data. Expectations are for the ECB to leave interest rates unchanged and maintain the current duration of the bond buying program (PEPP). However, how will Christine Lagarde navigate between a stronger Euro and stronger yields, and a current poor environment regarding the coronavirus and economic data?

EUR/USD

Christine Lagarde will have to talk down yields and the Euro. Many countries are set to end lockdowns within a few weeks. Vaccines are moving slowly, though the pace is expected to increase. This may be why traders are selling bonds (resulting in rising yields) and buying EUR/USD now. Although she will discuss the light at the end of the tunnel and how bright the future looks, this is years away. She will likely talk about how inflation will increase in the near term “due to temporary factors”. She must temper any hopes that the ECB may begin tapering anytime soon. Under the PEPP program, the ECB has 1.85 trillion Euros to use to buy bonds, at their discretion (unlike the Fed who is committed to buying $40 billion/month in MBS and $80 billion/month in government bonds). At the March 11th meeting, the ECB said they would increase the pace of their bond purchases, which they did. With higher yields and a higher Euro, will they increase the pace of bond purchases again or maintain it at current levels?

Whatever the ECB and Christine Lagarde say and do, they must be convincing enough to try and keep yields and the Euro “low” until the next ECB meeting on June 10th (when they will have new projections). However, they always have “all tools available” and can act inter-meeting if necessary. The goal of this meeting will likely be to bide time until the ECB can see how quickly countries can reopen and how efficiently vaccines can be distributed.

 

 

Forex.com
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Featured Analysis

Learn Forex Trading