Though not the worst G10 performer on the day (NOK takes that mantle, down a staggering nearly 2% on the day vs USD as crude oil prices are crushed), EUR is certainly amongst the laggards.
In wake of a dovish ECB meeting, where the bank signalled in no uncertain terms that more monetary policy stimulus is on the way in December, EURUSD has slumped to one month lows of below 1.1700. To the downside, very little be way of notable support separates stands between the cross’ current levels and late September lows around 1.1610.
So, what actually happened at today’s meeting… Below is a summary of the comments made by the ECB its updated statement and by President Lagarde in the Press Conference.
ECB Rate Decision and comments in the statement
- Rate Decision - The key lending rate (the deposit rate) was left unchanged at -0.5%, as expected. The ECB expects interest rates to remain at their present or lower levels until it has seen inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics
- On the balance of risks to the economic outlook - In current environment of risks clearly tilted to downside, ECB says it will carefully assess incoming information, including the dynamics of pandemic, the prospects for a rollout of vaccines and developments in exchange rate.
- On December’s Rate Decision - A new round of Eurosystem staff macroeconomic projections in December will allow a for a thorough reassessment of economic outlook and balance of risks. On basis of this updated assessment, ECB will recalibrate its instruments, as appropriate, to respond to unfolding situation and to ensure that financing conditions remain favourable to support economic recovery and counteract negative impact of pandemic on projected inflation path. This will foster convergence of inflation towards its aim in a sustained manner, in line with the ECB’s commitment to symmetry
- On its Covid-19 emergency QE package - The ECB will continue its purchases under pandemic emergency purchase programme (pepp) with a total envelope of €1,350 billion. These purchases contribute to easing overall monetary policy stance, thereby helping to offset downward impact of pandemic on projected path of inflation. Purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. This allows the ECB to effectively stave off risks to smooth transmission of monetary policy. Moreover, the ECB will conduct net asset purchases under the PEPP until at least end of June 2021 and, in any case, until it judges that coronavirus crisis phase is over and will reinvest all principal payments from maturing securities purchased under the PEPP until at least the end of 2022. In any case, nay future roll-off of the PEPP portfolio will be managed to avoid interference with appropriate monetary policy stance. Net purchases will continue at a monthly pace of €20 billion, together with purchases under additional €120 billion temporary envelope until end of year.
- On its pre-Covid-19 QE programme – The ECB continues to expect monthly net asset purchases under its Asset Purchase Programme (APP) to run for as long as necessary to reinforce accommodative impact of its policy rates, and to end shortly before it starts raising interest rates. The ECB intends to continue reinvesting, in full, principal payments from maturing securities purchased under app for an extended period of time past date when it starts raising interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation
- On refinancing operations – The ECB will also continue to provide ample liquidity through its refinancing operations. In particular, its third series of TLTROs remains an attractive source of funding for banks, supporting bank lending to firms and households.
Lagarde Press Conference
- Giving some more colour the outlook for the Eurozone economy - Infections present renewed challenges to growth, whilst incoming data signals that recovery is losing momentum more rapidly than expected. With containment measures set to weigh on activity, there has been a clear deterioration in the near-term outlook, reflected in the fact that activity in services has been slowing visibly. Uncertainty about the outlook weighs on investment, whilst inflation is also dampened by low energy prices. Though the Eurozone economy rebounded strongly in Q3 (as GDP data tomorrow will show), the recent surge in the infection rate presents a clear headwind. Recent data and surveys point to significant softening in activity in Q4. Looking further ahead, once the impact of the pandemic fades, the recovery in demand will put upward pressure on inflation in medium term. Given the above, Lagarde urged that there should be no delay in next generation EU fiscal package.
- On what is next for the ECB – Lagarde noted that the governing council (the ECB voters) are in total agreement on their analysis. Moreover, the council agreed to take action and recalibrate at next meeting, with the recalibration will look at all instruments. There is little doubt that the ECB will act in December, Lagarde said.
What all of this means…
Pretty much, given the worsening economic outlook in the Eurozone due to the acceleration in Covid-19’s spread and countries going back into lockdown, the ECB has signalled that more easing is to come in December. By December, the ECB will have had the chance to update its economic forecasts and will have had time to come up with a new package of easing to assist the Eurozone economy through the winter.
What sort of easing could the ECB deliver?
Most now expect another EUR 500bln in QE via the PEPP. New long-term refinancing operations are also a possibility, perhaps at even more favourable rates than before (bank can already borrow money at -1% to lend out to the economy). Some might also be calling for more interest rate cuts.
What does this all mean for EUR?
With the Fed on hold for the time being, as Fed policy makers look for more economic assistance in the formal of more fiscal spending from the government after the election, the contrast between the US and EU regarding monetary policy is widening. More simply, the ECB is getting more dovish while the Fed is on hold… this is a not a good thing for EURUSD, and is a theme that is likely to weigh on the cross over the coming weeks (as in, it gives markets more reason to sell EURUSD rallies).
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