ECB Quick Analysis: Where is Lagarde's largesse? Failure to add QE may send EUR/USD tumbling
- The ECB left its QE plan unchanged and only said it may increase them.
- Several tweaks in its policy are insufficient to convince investors.
- EUR/USD has significant room to fall, especially if spreads continue widening.
The European Central Bank has had its say – by leaving the bond-buying program unchanged, far from what is needed. The ECB has disappointed investors and the euro may suffer. The Frankfurt-based institution left the PEPP bond-buying scheme unchanged at €750 billion and only said it is ready to increase it and let it run through the year-end. That is insufficient amid the rapid pace of deploying funds and the gravity of the situation, as data has shown.
The ECB announced the Pandemic Emergency Purchase Program (PEPP) in an emergency meeting on March 18 and the money is running out fast. The bank's front-loading – to alleviate investors' fears about government funding issues – implies that funds will run out around October.
Earlier, eurozone Gross Domestic Product figures were grim. The Italian economy shrank by 4.7% in the first quarter the Spanish economy shrank by 5.2%, and the French one by 5.8% – the worst contractions since Word War II. As a whole, the euro area's output plunged by 3.8%, worse than expected, and is still prone to revisions once Germany's data is out. Moreover, there is no doubt that the second quarter will be far worse.
PELTROs: The ECB did announce a serious of tweaks, including easing lending conditions to banks on condition of them borrowing them to the real economy. One of the new programs is called pandemic emergency longer-term refinancing operations (PELTRO). This new addition to the bank's alphabet soup is only a minor change and far from enough. The bank also failed to pledge that it would enlarge the program in June when staff release new forecasts.
The verdict in debt markets is swift – the spread between Italian and German bonds is rising as investors are disappointed.
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Growing funding pressures by hard-hit countries may exacerbate the falls in EUR/USD. Targets include 1.0850, 1.0810, and 1.0770.
Author
Yohay Elam
FXStreet
Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.
