Giles Coghlan LLB, Lth, MA
Financial Source
The ECB has three main tools that they use for their monetary policy mandate which has recently shifted emphasis a little. Here is what we need to know.
ECB strategic review
This policy review meant that the ECB dropped their ‘close to, but below 2%’ inflation target. It is now at 2% with tolerance for temporary spikes above. This has led some to speculate that the ECB might need to be more accommodative to try and hit this target.
The three monetary policy tools
1. Interest rates.
These are expected to remain unchanged at current levels.
2. Pandemic emergency fund (PEPP).
This is due to run out in March 2022, with a €1,850 billion envelope.
3. Regular eurozone support via the APP.
This is set at €20 billion per month and is the general support for the eurozone.
The stage
Expectations have been increased for the meeting by Christine Lagarde who has hinted that the PEE (emergency) program could change into something else (could it be morphed into the APP program?). This has increased dovish expectations for the meeting.
A disagreement
On Friday a sources report stated that the ECB is in disagreement on stimulus guidance for the 22nd July meeting. Apparently, the talks were heated and the talks of bond purchases will not happen until September.
So, the takeaway is that there could be some kind of dovish shift from the ECB this meeting. So, it is worth watching out for. Remember to watch the EUR reaction carefully as sometimes the extra stimulus can boost the EUR even though the typical reaction of extra bond purchases is to weaken a currency. So, just watch out for that dynamic on EUR pairs. The EURUSD is sitting on a key trend line, so watch this area for a potential break lower if the ECB does make a dovish policy shift on Thursday.
Our products and commentary provides general advice that do not take into account your personal objectives, financial situation or needs. The content of this website must not be construed as personal advice.
Recommended Content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.