So, the European Central Bank did more or less what the markets had expected and extended the pandemic emergency purchase programme (PEPP) by €500bn to at least end of March 2022 and kept interest rates unchanged. The targeted longer-term refinancing operations (TLTRO) of ultra-cheap long-term loans offered to banks were extended by 12 months and there were a few other not-so-significant tweaks to its policy tools. The ECB re-iterated that it will continue to monitor exchange rate developments, regarding their possible implications for the medium-term inflation outlook.
In other words, the outcome of the ECB’s policy meeting was not exactly the “bazooka” that Christine Lagarde had indicated should was going to unleash. Sure enough, there was a bit of disappointment to the announcement as the stock markets barely responded and the euro extended its gains on the session on relief that the central bank was not going to intervene in the FX markets more meaningfully.
So why was the ECB conservative?
It is possible that the ECB was a little conservative with its policy response for two reasons. First, it now knows that
EU leaders will soon sign off the huge €1.8 trillion fiscal package which should help to boost the recovery anyway. Second, the developments of vaccines mean consumer and business confidence will likely improve in the months ahead, potentially leading to organic economic growth.
So, it is understandable why the ECB decided to take the actions it did today – something which Lagarde might echo in the ECB Press Conference, which was set to start at 13:30 GMT.
EUR/USD headed for 1.25 next?
But insofar as the EUR/USD is concerned, and barring a no-deal Brexit outcome, it could now slowly embark on a continuation of its rally towards the 1.25 handle, if it manages to break out of this short-term bull flag pattern:
Source: ThinkMarkets and TradingView.com
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