Not much new has arisen from the ECB’s announcement and Lagarde’s press conference this afternoon, as the institution sticks to its widely accommodative monetary policy stance broadly in line with expectations. The ECB stands firm on providing the much-needed policy support to the eurozone, at a time when the so-called V-shaped global recovery has been put to the test.
The single currency is slightly trending upwards from the policy signal provided by the central bank, while it also awaits the joint recovery fund and MFF to be agreed by EU leaders at some point this summer. After dealing with legal enforcement to justify the proportionality of the ECB’s policy tools and facing continuous controversy within the Governing Council, Lagarde has done a good job in propping up the role and confidence in the ECB as a key institution in the economic recovery. The combination of steady forward guidance on super low interest rates with a strong commitment on abundant debt purchases and direct liquidity provision to lending institutions looks like a very solid package, enough to maintain market stability and boost investor´s confidence in the Euro area.
The euro was trading towards its one-year high against the dollar ahead of the ECB meeting and continued that road during the press conference, which is of note considering the risk-off narrative in markets throughout today’s session.
Reassurance that the Pandemic Emergency Purchase Programme (PEPP) and other policy tools will run in full for as much as needed in a flexible manner adds another winning vow to Lagarde’s short tenure as head of the bank and amid a crucial juncture. The relatively positive tone of Lagarde´s assessment on the economic resumption in the context of the pandemic also helps to relieve investors’ concerns, particularly under the large uptake of liquidity funding provided by TLTROs and PELTROs. Any optimism, however, should be taken with a pinch of salt as the balance of risks to the economic outlook leans to the downside with a marked degree of uncertainty and inequality across countries in the area.
Crucially, Lagarde takes another shot into signalling the need for EU members to step up the fiscal support to a beleaguered economy, a practice that has firmed in ECB’s communication on the edge of the pandemic-driven crisis.
Hopes of a strong economic recovery in the EU are underpinned by the ECB’s stimulus so far. But, with the central bank’s tool kit largely put in place and repeated calls for fiscal stimulus, it is safe to say Lagarde and co. also hope for the €750 bn stimulus package proposed by the European Commission to become a reality. While the ECB has played a largely supportive role on the Eurozone bounce-back and euro uptick, there is still considerable room for single currency weakness depending on the progress of the joint fiscal response to the pandemic, as well as upside should the proposal make it through intact. Without a prompt solid support by EU leaders, set to meet on July 17th-18th for further negotiations, there is little more the ECB can do after the upsized delivery of monetary stimulus it has done to date.
EURUSD firms near its yearly highs on the back of a supportive ECB stance
Author: Olivia Alvarez Mendez, FX Market Analyst