News & analysis

The ECB delivers on market expectations and steps up the total amount of quantitative easing under PEPP purchases by €600 billion. The rise outperformed the consensus call by at least some €100 billion, bringing along a stronger-than-expected market reaction.

The programme’s firepower, worth €1.35 trillion now, is set to channel the main recovery mechanism by the ECB, which is vocally reinforcing its accommodative stance amid the current recession environment. The expansion of the programme comes at a critical juncture, as markets began to question whether the tool would run out of steam by the third quarter of the year, as over a third of the programme had already been exhausted. In line with the ECB´s previous virus response, Lagarde has done another good job in preemptively addressing unnecessary market speculation.

The euro has rallied over half a percentage point instantly, as the ECB’s strong support to Eurozone economic recovery broadly offsets the easing effects of a broader monetary base available in the economy; while periphery yield spreads also shrank.

The extension of the horizon for net purchases under PEPP, from the end of 2020 to at least the end of June 2021, only has a slight balancing effect on the reinforced policy message. The extended conditions of the programme (both in size and duration) guarantee its sustainability at the pace of purchases already implemented to date – some €90 billion per month on average. The latter is crucial to the ECB’s reinforcing intentions, since it could be expected that financing needs easing as the worst economic effects of the pandemic pass by, leaving ample spare room in the ECB’s hands.

In any case, the main takeaway from Lagarde’s statements is that the ECB abides by impending funding needs in the Eurozone, while also standing firm on long-term commitments to monetary stability and symmetry across the area.

Downgraded macroeconomic projections play a smaller role in further dampening the already bleak economic expectations, but instead serve as a solid channel to justify the ECB’s action and avoid further criticism from legal observers. The bar for a larger euro appreciation stands relatively higher after today’s ECB announcement, as the currency has already priced a large amount of monetary support. The European Commission recovery fund, on the other hand, stands as the potential additional booster, both for the Eurozone and the single currency, as the ECB has once again highlighted in today’s presentation.

 

The ECB sends the euro to an 11-week high with larger-than-expected monetary support to the eurozone recovery

 

The narrowing BTP-Bund yield spread hints at a well-done job by the ECB

 

Author: Olivia Alvarez Mendez, FX Market Analyst

 

 

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