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Euro Gains Ground after ECB

ECB to wind up PEPP, increase APP

The euro has extended its gains and touched 1.1360 earlier, its highest level in December. This follows the ECB policy meeting earlier today. In the North American session, EUR/USD is trading at 1.1332, up 0.34% on the day.

With the major economies showing decent growth and inflation running at high levels, major central banks find themselves under pressure to tighten policy. This week we saw the Fed double its taper, while the Bank of England surprised the markets by raising rates from -0.15% to 0.25%. The ECB has opted not to follow suit and will continue its accommodative policy.

As expected, the ECB announced that it would scale back its bond purchases under the EUR 1.85 trillion Pandemic Emergency Purchase Programme (PEPP) and would wind up the scheme in March 2022. Once PEPP ends, however, the ECB will increase QE through its Asset Purchase Programme (APP), which currently runs at a clip of EUR 20 billion/month. The bank will double bond purchases to EUR 40 billion in Q2 and reduce this to EUR 30 billion in Q3. In October 2022, purchases will be kept at EUR 20 billion for “as long as necessary”.

There had been dissension within the ECB on what to do with APP after PEPP ended. Doves had called for a doubling of APP, while the hawks wanted to maintain it at current levels. The move devised by the ECB represents a compromise between the two positions, with APP to double to 40 billion but then gradually decrease back to 20 billion.

What is significant is that the ECB continues to move in an opposite direction to the Federal Reserve. At its policy meeting on Wednesday, the Fed accelerated its taper and the dot plot indicated that rates could be raised up to three times in 2022. After the Fed meeting, Chair Jerome Powell circled inflation as a threat that has to be contained. Inflation has not surged to the same extent in the eurozone as in the US, and the ECB, unlike the Fed, is yet to ditch its script that inflation is transitory.

 EUR/USD Technical

  • EUR/USD is putting pressure on support at 1.1245. Below, there is support at 1.1173
  • There is resistance are 1.1372 and 1.1427

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