- The ECB announced an expansion of €500 billion in QE as expected.
- Extending the program through March 2022 is a positive surprise.
- Comments about the exchange rate have been left unchanged, allowing the euro to rise.
It is almost Christmas – and while the European Central Bank holds socially distanced events, it has been able to grant gifts to markets. The Frankfurt-based institution will expand its Pandemic Emergency Purchase Program (PEPP) by €500 billion and will run it at least through March 2022.
While the size of the additional boost was expected, the longer duration is giving a boost to the euro. The bank is also committing to keep its foot on the pedal "until it judges that the coronavirus crisis phase is over." Is the ECB referring to the health crisis or the ensuing economic one? The commitment seems broad enough for markets.
Contrary to pre-pandemic times, printing money is good for the currency – at least when it comes to the euro and the pound. The logic is that governments benefit from low borrowing costs and boost the underlying economies, thus making the common currency more valuable. That contrasts the pre-pandemic logic that creating money out of thin air devalues the currency.
Is the bank worried about the recent surge in EUR/USD? The answer is no. The ECB left its language on the topic unchanged in its statement:
We will also continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook.
This monitoring has not led to intervention – and without any change in language, euro bulls seem to be shielded from such action. EUR/USD has room to rise in response to this statement. Will the ECB try to jawbone the euro down?
Christine Lagarde, President of the European Central Bank has previously tried to talk down the euro. At the time of writing, she has yet to make a strong comment on the topic – despite the recent surge. A higher exchange rate results in weaker inflation due to lower prices of imported goods. It also makes European exports less attractive. Yet without anything explicit, the common currency has room to rise.
All in all, low borrowing costs, money flooding to governments, and no rush to lower the exchange rate seem like a winning combination for EUR/USD gains.
The ECB's "single needle in its compass" is price stability, with an inflation target of 2% or close to 2%. The most recent figures for November showed a drop of 0.3%, while the Core Consumer Price Index rose by only 0.2%. The covid crisis has been deflationary so far.
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