Euro yawns as German Business Climate slows

The euro is almost unchanged on Friday, after posting considerable gains a day earlier. In the European session, EUR/USD is trading at 1.1323, down 0.06% on the day.

ECB taketh and giveth

The ECB confirmed that its emergency Covid support programme (PEPP) will end as scheduled, in March 2022. This was essentially old news. The burning question ahead of Thursday’s policy meeting was whether the bank would increase bond purchases under its Asset Purchase Programme (APP), which currently runs at a clip of EUR 20 billion/month. There was sharp dissension within the ECB what to do with the APP – hawkish members wanted to maintain the current pace, while dovish members were urging a doubling of the pace to EUR 40 billion/month, in order to cushion the economies of the poorer members of the bloc after PEPP runs out. In the end, we saw a classic ECB compromise, where nobody got exactly what they wanted. Under the plan, APP will increase to 40 billion after PEPP winds up, but this will be reduced to 30 billion in Q3, and fall back to 20 billion in October 2022 for “as long as necessary”.

In a press conference after the meeting, ECB President Christine Lagarde said that there was a broad majority for this QE package, adding that a rate hike was unlikely in 2022. The ECB has given itself plenty of flexibility after PEPP with the use of APP, in order to avoid any market turbulence when PEPP is wound up.

The ECB’s cautious position stands in sharp contrast to the hawkish moves we saw from the Federal Reserve and the Bank of England this week. The Fed accelerated its taper of its bond purchase scheme, while the BoE surprised the market with a rate hike, the first such move by a major central bank during the Covid pandemic. In the words of one analyst, the Fed and BoE are from Mars, while the ECB is from Venus. The ECB has not had to contend with red-hot inflation like the Fed and BoE, but if inflation accelerates in the eurozone, the ECB may have to take a hawkish pivot and follow in the footsteps of its Anglo-Saxon counterparts.

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 EUR/USD Technical

• The next support level is at 1.1245. Below, there is support at 1.1173
• There is resistance at 1.1372 and 1.1427

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