• ECB plans to start policy normalization by reducing PEPP purchases.
  • Investors want to know how the ECB will continue to support the economy.
  • A dovish policy outlook could cause EUR/USD to turn south.

The European Central Bank (ECB) is widely expected to leave the interest rates on the main refinancing operations, the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50%, at the December policy meeting. More importantly, the ECB is set to take a step toward policy normalization and unveil its plan to retire the Pandemic Emergency Purchase Program (PEPP). Additionally, the bank will release the updated macro projections. 

Several ECB policymakers, including President Christine Lagarde, noted in the previous weeks that it would be appropriate to conclude the PEPP by March. Similarly, "the view was held that judging on the basis of the current developments, net purchases under the PEPP could be expected to come to an end by March 2022." the accounts of the ECB’s October meeting read.

As it currently stands, the ECB’s quantitative easing program runs at around €80 billion per month, €20 billion of which is via the Asset Purchase Programme (APP). With European economies struggling to preserve the growth momentum amid the Omicron variant, the ECB will have to reassure markets that they will continue to support the economy even if they decide to end the PEPP at the end of the first quarter of 2022.

Hawkish scenario

The ECB could decide to end the PEPP in March and refrain from adjusting its other tools or introducing another one to ease the normalisation process due to inflation fears. The last ECB projections published in September showed that inflation was forecast at 2.2%, 1.7% and 1.5% in 2021, 2022 and 2021, respectively. In case the ECB were to adopt a hawkish stance, the euro is likely to gather strength against its rivals and trigger a sharp rebound in EUR/USD. 

This is the least likely scenario because ECB Governing Council members said numerous times that they were expecting factors ramping up inflation to start to dissipate in the second half of 2022. Moreover, Lagarde mentioned that the ECB has other tools that it can use to replace the PEPP. 

Dovish scenario

The ECB could extend the PEPP to the end of the second quarter and cause the shared currency to suffer heavy losses against its major rivals. If the ECB were to do that, however, it would lose its credibility after communicating that the program would end in March.

Instead, it may be more plausible for the ECB to increase the amount of purchases in the APP in March. If the APP purchases are raised to €40 billion from March, the euro’s losses are likely to remain limited following an immediate reaction. A bigger-than-€40 billion APP from March would also be considered as a dovish stance and hurt the common currency.

There is also the possibility of the ECB introducing a brand new tool to substitute the PEPP. No matter what the new tool looks like, markets will assess the total amount of QE. 

EUR/USD technical outlook

EUR/USD has been fluctuating between 1.1250 and 1.1350 since the beginning of the month. The pair’s next decisive move is likely to occur outside of that channel. On the daily chart, the Relative Strength Index (RSI) indicator is moving sideways a little below 50, confirming the view that the pair is in a consolidation phase.

A dovish ECB outcome could drag EUR/USD below 1.1250 (static support) and open the door for additional losses toward 1.1200 (psychological level) and 1.1185 (2021 low). 

On the other hand, the pair could target 1.1400 (psychological level, Fibonacci 38.2% retracement of November downtrend) if it manages to clear 1.1350 on a hawkish surprise. 1.1450 (50-day SMA) and 1.1500 (psychological level, Fibonacci 61.8% retracement) align as next resistances. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content

Recommended Content

Editors’ Picks

EUR/USD holds above 1.0700 after US inflation data

EUR/USD holds above 1.0700 after US inflation data

EUR/USD stays in the lower half of its daily range but continues to trade above 1.0700 in the early American session on Friday. The data from the US showed that the annual Core PCE Price Index declined to 4.9% in April as expected, making it difficult for the dollar to gather strength.


GBP/USD trades above 1.2600 as dollar struggles to find demand

GBP/USD trades above 1.2600 as dollar struggles to find demand

GBP/USD clings to daily gains above 1.2600 and remains on track to end the week in positive territory. The greenback struggles to attract investors after the data from the US showed that PCE inflation softened in April. 


Gold pulls away from daily highs, holds above $1,850

Gold pulls away from daily highs, holds above $1,850

Gold has lost its traction in the second half of the day on Friday and declined toward the $1,850 area. The benchmark 10-year US Treasury bond yield staged a modest rebound on the US PCE inflation data, not allowing XAU/USD to preserve its bullish momentum.

Gold News

Terra’s LUNA 2.0 support expands with Binance and Kraken welcoming the airdrop, here’s how you need to prepare

Terra’s LUNA 2.0 support expands with Binance and Kraken welcoming the airdrop, here’s how you need to prepare

Terra’s LUNA fork proposal has passed with 65.5% votes, Revival Plan 2 in action without algorithmic stablecoin UST. LUNA price could wipe out losses incurred by holders in the colossal crash of LUNC and UST. 

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!