The next big risk event for EUR is fast approaching, we have the ECB’s latest interest rate decision and policy statement coming out at 1245BST/0745BST.
At its last meeting on March 12th, the ECB underwhelmed markets with its Covid-19 response. Markets wanted a rate cut and a big increase in the size of the ECB’s QE programme. What they got was a small EUR 120bln increase to the existing QE programme.
Markets were disappointed, as evidenced in a deterioration in risk sentiment and an increase in the yield differential between German and Italian debt (people started to doubt the ECB would be there to save Italy).
However, the ECB quickly saw the error of its ways, and one week later announced a substantial new QE programme, called the Pandemic Emergency Purchasing Programme (PEPP), worth some EUR 750bln.
Moreover, the ECB also recently expanded its collateral eligibility (when banks want to borrow from the ECB, they have to provide a security, such as a bond, as collateral incase they default on the loan). “Fallen angel” debt (defined as debt of companies who were seen as “investment grade” prior to April 7th, but have since been downgraded as a result of the Covid-19 pandemic) will now be included, making their lending programmes less restrictive. Most analysts expect the bank to keep its Deposit Facility Rate (its key lending rate) at current, record low levels of -0.5%. Attention is more likely to focus on potential increases to the PEPP. Most analysts see a further increase in size and scope of the ECB PEPP programme as likely (via an increase from EUR 750bln to EUR 1.25trln and the expansion of eligibility to fallen angel and other high yielding debt), though there is disagreement over whether the move will come at the April or June meeting. If an increase was to come today, this would be dovish, which would typically be EUR negative. However, given growing risks of another debt crisis and EUR fragmentation due to Covid-19, this might be taken as another “whatever it takes” signal from the ECB, and be a EUR positive. Analysts are split on how EUR might react. Elsewhere, markets will closely watch President Lagarde’s press conference performance, to see if there is any repeat of last month’s “we are not here to close spreads” gaffe. Remember, at the time, the markets took that comment as an indication that the ECB was saying it will NOT do whatever it takes to save the EUR. Lagarde gaffe risk is, of course, a risk to EUR.
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