ECB Quick Analysis: Why Lagarde's short-term fix is lose-lose for the euro


  • The ECB has left its policy unchanged and vowed to ramp up bond-buying next quarter.
  • Potentially lower European yields may weigh on the currency.
  • The lack of commitment to longer-term support means fewer funds for the economy. 

Christine Lagarde's largesse is gone – at least for the long-term – and that is bad news for euro bulls. European Central Bank President Christine Lagarde has overseen an announcement to expand bond-buying in the second quarter.

That pledge has come after the bank surprisingly purchased fewer bonds in recent weeks – a surprise given officials' complaints about rising yields. If the bank indeed ramps up its bond-buying activities and returns on debt fall, that could weaken EUR/USD. On the other side of the Atlantic, the Federal Reserve accepts higher yields as a sign of better growth prospects. This gap is favorable for the dollar.

On the other hand, the Frankfurt-based institution has left its total Pandemic Emergency Purchasing Program (PEPP) unchanged at €1.85 trillion. Moreover, the ECB has kept the door open to buying less – saying the "envelope" may not fully be used. Keeping a cap on total buying and adding a dose of confusion does is another negative for the common currency.

During the covid crisis, the euro advanced each time the ECB expanded its total buying. Contrary to pre-pandemic logic, more monetary funds are now seen as allowing governments to buy more and boost growth – thus positive for the economy and the currency.

The bank also noted that risks have become more balanced, thus showing more reluctance to expanding it in the future. 

Europe continues struggling with coronavirus, a growingly frustrating vaccination campaign, and a sluggish rollout of fiscal support. While the ECB is not the only game in town anymore, it seems to hold back on additional support. 

All in all, the bank's stance is a lose-lose for EUR/USD. 

The move is minimal in the short term and could snowball the next time the US yields edge higher. 

Follow all the ECB action here

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.

Feed news

Latest Forex Analysis


Latest Forex Analysis

Editors’ Picks

EUR/USD recovers within range, lacks follow-through

Encouraging macroeconomic data from the EU and the US boosted risked sentiment, which in turn, helped EUR/USD to advance, currently nearing the weekly high at 1.2075.

EUR/USD News

GBP/USD trades around 1.39 after a choppy reaction to the BOE

GBP/USD is trading around 1.39 after an 80-pip move around the BOE's "Super Thursday." The bank announced a slowdown in buying bonds but no change to the overall scope. US jobless claims and elections in Scotland are awaited. 

GBP/USD News

Gold Price Analysis: Gold bears seeking a correction to test bullish commitments

Gold has broken above the $1,800 mark, hitting the highest levels since February. The Confluence Detector is showing that XAU/USD has very few barriers through $1,850. Bears are lurking at resistance structure, eyeing a correction ahead of NFPs.

Gold News

Dogecoin price targets $1 as the chase for high-yielding cryptos accelerates

Dogecoin price strength combined with the complementary volume highlights the continued fascination in the digital token, portending further gains in the days ahead.

More Dogecoin News

US Nonfarm Payrolls April Preview: When the economy booms, its all about rates

The US labor market’s stars appear aligned for April.The economy is expanding rapidly, employers are confident and consumers eager to throw off the restraints of the past year.

Read more

Majors

Cryptocurrencies

Signatures