News & Analysis

After a major hawkish surprise from the Bank of England, the European Central Bank’s decision was more in line with market expectations as the central bank confirms that the Pandemic Emergency Purchase Programme is still set to end in March, while the Asset Purchase Programme will be adjusted to avoid a cliff-edge effect in European bond markets. The ECB decided on a monthly net purchase pace of €40bn in Q2 and €30bn in Q3 under APP before the more traditional QE vehicle resets at a pace of €20bn from Q4 onwards, while PEPP reinvestments will be extended to at least the end of 2024.

The decision, despite offering no major surprises like the one by the BoE, saw the euro rise to fresh weekly highs against the US dollar while German Bund yields also jumped.

This is because it comes on the hawkish side of expectations as it was unknown whether the ECB would actually announce a bridging mechanism for once PEPP expires given the uncertainties around Omicron and the recent lockdown measures in several eurozone countries. The fact that they did suggests some reluctance to keep pandemic related policy in place despite the growth risks present in the eurozone economy. Whether the decision to set the pace of QE in stone for the whole of 2022 was a good idea or not will be determined over the course of the next year.  Markets now turn to what is said by President Lagarde in today’s press conference at 13:30 GMT.


EURUSD (navy) rises to fresh weekly highs along with German 2Y yields (turquoise) after the statement, but Lagarde’s press conference takes front-end yields lower


The uncertainties around Omicron and the latest European restrictions meant Lagarde could add a dose of caution in the press conference as the economic outlook remains clouded.

These uncertainties were also reflected by lower purchasing managers’ index figures as evidenced by data earlier in the day, as rising Covid cases are dampening the services sector. The latest dip in inflation, as referenced by Lagarde in the press conference, and ongoing uncertainties in the eurozone justify a pushback from the ECB on market expectations of a rate hike in 2022, which is exactly what Lagarde did in the press conference as she stated it is highly unlikely the ECB will raise rates next year. Markets readjusted after this, which caused the 2Y Bund yield to reverse throughout the press conference.

Lagarde’s pushback on a rate hike next year came as the Bank of England hiked rates for the first time since the pandemic while the Federal Reserve signalled three rate hikes in 2022.

This solidifies the ECB’s position as the dovish outlier, but this didn’t stop EURUSD from rising throughout the press conference. This is partly due to the upside risks mentioned by Lagarde and the increased nearer-term CPI projections, with the 2022 figure set to rise to 3.2% (up from 1.7% previously) before edging down. At the same time, markets viewed the ECB decision in context of the FOMC decision last night and in relation to market expectations. With the Federal Reserve, expectations were not exceeded despite the substantial shift in the latest dot plot, while the ECB today committed to its normalisation path despite having a get out of jail free card in the form of Omicron. The result of today’s ECB meeting is broadly in line with the Bank of England’s in respect to surprising market expectations, despite the European Central Bank refraining from materially changing rates. This partly explains why the rally in GBPEUR moderated following the ECB decision, however, we expect sterling to close the day out on a stronger note relative to the euro given the more aggressive move in Gilt yields.


December 2022 rate expectations in the eurozone fall (price rises) after Lagarde states that a rate hike in 2022 is highly unlikely


Author: Ima Sammani, FX Market Analyst



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