As expected, the ECB has kept its policy unchanged, but it has decided to “moderately” lower the pace of net asset purchases under the PEPP compared to the previous two quarters. This means that the difference is only going to be marginal and it something that is already priced in. The rest of the message from the policy statement was quite dovish, allowing the European indices to make further ground after they had already bounced off their lows prior to the release of the policy statement. Attention will be on Christine Lagarde’s press conference at 13:30 London time. Will Lagarde appear a little more hawkish in light of the taper and improvement in Eurozone data and pickup in inflation, or try to convince the markets that reduced PEPP flows is nothing to worry about it and that it could be reversed?
According to the ECB:
"Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters"
“The Governing Council will continue to conduct net asset purchases under the PEPP with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over.”
Meanwhile, APP will continue at €20bn a month...
“for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.”
The ECB press conference could provide fresh impetus for European stocks and the single currency. Lagarde’s tone will be scrutinized very closely by the markets, and if she says anything that is slightly different to her previous dovish remarks then the euro could make a more decisive move higher, while European stocks will probably show a mild reaction as they had already weakened in advance of the meeting.
The key challenge for Lagarde is to prevent bond yields from rising sharply, so she will need to convince investors that the reduction of purchases under the ECB’s emergency stimulus will not impact the economic recovery. Judging by her previous speeches and conferences, I can’t see why she would change her tone significantly.
For that reason, we could see the DAX stage a more significant recovery and it could potentially make a move towards its previous high. However, with the trend line since March 2020 broken, the bulls might want to proceed with extra care until that trend line is re-claimed, ideally on a daily closing basis.
Source: ThinkMarkets and TradingView.com
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