ECB Recap: Unchanged, too early to discuss exiting PEPP

The ECB has “kicked the can down the road”


The ECB left rates unchanged at 0%, as expected.  In addition, the central bank said that they would continue to purchase bonds under the Pandemic Emergency Purchase Program at a “significantly higher pace”.  During the press conference that followed, ECB President Christine Lagarde said that the decision to keep that wording was unanimous.  As we discussed in the ECB Preview, the big question heading into the ECB meeting would be whether members would discuss lowering bond purchases back to pre-March levels. Christine Lagarde said that it was “premature” and “too early” for the discussion and it “will come in due time”.  That doesn’t sound like they will be lowering bond purchases any time soon!

Your guide to the ECB!

In addition to the bond buying discussion, the ECB released its quarterly forecasts.  Members revised GDP to 4.6% for 2021 from 4.0% in March and 4.7% in 2022 from 4.1% in March.  In addition, 2021 inflation was revised to 1.9% from 1.5% in March and for 2022, it was revised to 1.5% from 1.2%. They said that although bottlenecks could pose near term headwinds (inflation), the recovery will be buoyed by stronger domestic demand.  Interestingly, they kicked the meeting off by saying that the ECB will be monitoring the exchange rate in their inflation outlook. 

News of more bond buying and “kicking the can down the road” would have one think EUR/USD would head lower.  Combine that with a stronger than expected US CPI, and EUR/USD should be falling through the floor.  However, following the ECB and the CPI, EUR/USD is near unchanged on the day after a 50-pip dip was quickly bought into.  Over the course of the last month, the pair has been confined to roughly a 200-pip range between 1.2050 and 1.2250.  A breakout of either side of the range will determine the next direction for EUR/USD.

Source:  Tradingview, City Index

On a daily timeframe, although EUR/USD has broken underneath the bearish wedge formation, it has been trending sideways in a symmetrical triangle pattern and is nearing the apex.  Expectations are for price to breakout in the same direction as the prior tend, which would be higher.  Resistance is at yesterday’s high and the top downward sloping trendline of the triangle near 1.2218.  Above there, resistance is at the May 26th highs near 1.2267, ahead of horizontal resistance and the bottom upward sloping trendline of the bearish wedge at 1.2350.  Support is at the bottom upward sloping trendline of the triangle near 1.2130, ahead of horizontal support at 1.2104.  Below there, EUR/USD can fall to the 38.2% Fibonacci retracement level from the March 31st lows to the May 26th highs near 1.2048.

Source:  Tradingview, City Index

After high anticipation of possible fireworks from the ECB meeting today, it turned out to be dud. The ECB has “kicked the can down the road”, as it’s premature and too soon to discuss tapering.  The next ECB meeting isn’t until July 22nd.   The question traders should be asking now is the same one we were asking heading into this meeting: “If inflation continues trending higher over the next 6 weeks, will the ECB consider lowering bond purchases back to pre-March levels?” After today’s meeting, Christine Lagarde seems to be hinting that the answer will be “No”.

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