European Central Bank Preview: Five reasons for Lagarde to lift the euro


  • The ECB is set to leave its policy unchanged in April but acknowledge a brighter outlook.
  • Vaccines, business optimism and stable yields are among the reasons for a more optimistic approach. 
  • EUR/USD has room to rise on expectations that the bank would scale back its PEPP plan.

"Delayed, not derailed" – that has been the message coming from Christine Lagarde, President of the European Central Bank, and she will likely repeat it. However, while the Frankfurt-based institution announced it would bring forward some of its support in its March meeting, the view could be significantly different this time. That could lift the euro.

Here are five reasons for a rosier message:

1) Vaccination finally picking up

Many Europeans remain frustrated with the old continent's lag behind the US and the UK on the immunization front, but the pace of inoculations has substantially picked up. Roughly one in every five residents has received a jab and vaccine deliveries are set to accelerate in the coming months. 

Source: FT

The EU recently announced a boost of 50 million doses of the Pfizer/BioNTech doses are coming this quarter, and regulators may give the green light to Johnson & Johnson's jabs by the time the ECB convenes. Accelerated prospects of exiting the crisis could be reflected in the bank's comments. 

2) Survey optimism

While some economies are still under a lockdown and COVID-19 infections are high, businesses are optimistic. The German ZEW Economic Sentiment, the Sentix Investor Confidence and Markit's Purchasing Managers' Indexes have been rising and surprising to the upside in recent months. 

Source: FXStreet

To make forward-looking assessments, the ECB looks at these gauges of future activity and it may also shape their upbeat outlook.

3) Uncle Sam wants (also) European goods

"When the US sneezes, the world catches a cold" – goes the adage about economic crises, and the same goes for booms. US Retail Sales leaped in March by 9.8%, a result of US vaccinations and massive fiscal and monetary stimulus. Americans not only consume local goods but also purchase products and source materials abroad.

The US recovery is set to lift the global European economies, and is also a factor in Lagarde's considerations – and that is before President Joe Biden passes his vast infrastructure bill.

4) Yields still under control

Last month, the ECB announced it would bring forward some of its bond-buying to keep yields lower and support the nascent recovery and keep governments' borrowing costs depressed. The bank publishes its weekly purchases every Monday and it struggles to ramp up its acquisitions, keeping traders perplexed.

Nevertheless, yields remain depressed, helping governments raise money and support the recovery. Returns on ten-year Italian bonds are around 0.80% at the time of writing – roughly half of US Treasuries of the same maturities. German yields are well below zero. 

Source: Trading Economics

Under these circumstances, the bank may continue buying bonds at a sluggish pace, printing fewer euros while the economies continue recovering. 

5) Hawks rising from their nests

The Frankfurt-based institution's hawks have been rather tame in recent months, as Europe endured new waves of the virus. However, German and other northern members may revert to their inflation-averse roots as consumer prices lift their heads across the pond. 

Similar to the positive influence the US boom has on Europe, its rising prices may also affect the old continent. The ECB has a "single needle in its compass" – fighting inflation – and that may bring Bundesbank President Jens Weidmann and several colleagues to hit the breaks. 

Any hint that the bank's Pandemic Emergency Purchase Program may not run its full course – refrain from using the "full envelope" as the ECB says – could also be euro positive.

Conclusion

All in all, the spring brings with it a rosier economic outlook and the ECB has good reasons to be more cheerful. That would boost euro bulls as well.

 

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: EU vaccine deal helps extend US NFP-led run-up to fresh multi-day top towards 1.2200

EUR/USD begins the week with an uptick to refresh highest levels since February 26, wobbles around the top of late. EU battles for more vaccines as jab jitters disappoint the bloc members, Brexit, sluggish data add to the fears. DXY marked the biggest daily losses in six months after NFP debacle.

EUR/USD News

GBP/USD: Bulls on top in the open, but W-formation is compelling

GBP/USD is a mixed picture for days ahead as the price extends higher but leaves a bearish chart pattern on the daily time frame. The monthly chart is bullish while above the support structure as the price runs deeper into the supply territory.

GBP/USD News

Dogecoin: Defending 21-DMA is critical for DOGE after Musk calls it a ‘hustle’

The selling pressure in the Dogecoin (DOGE/USD) remains unabated for the second straight day on Sunday, as the corrective mode from all-time highs of $0.7605 remains intact. DOGE bulls remain hopeful as 21-DMA support holds, with RSI still bullish.

Read more

GBP/USD: Bulls on top in the open, but W-formation is compelling

GBP/USD is a mixed picture for days ahead as the price extends higher but leaves a bearish chart pattern on the daily time frame. The monthly chart is bullish while above the support structure as the price runs deeper into the supply territory.

GBP/USD News

S&P 500, Nasdaq Week Ahead: Fed to markets, we have your back never mind the jobs report!

Well after a fairly sluggish start to the week things certainly sprang to life on Friday as a brutal employment report was a catalyst for a strong rally! Go figure. Well, the logic is actually not as stupid as it first appears. Bears have been hibernating and face possible extinction.

Read more

Majors

Cryptocurrencies

Signatures