The European Central Banks (ECB) surprised markets last week as it over-delivered on its promises. Combined with the German fiscal package announced a day earlier, the ECB’s message sent the Euro pairs higher across the Forex dashboard, in a massive short squeeze.
The market anticipated an increase in the Pandemic Emergency Purchase Programme (PEPP) of EUR500 billion and no change in the interest rate level. Indeed, the ECB didn’t change any of the three interest rates it sets (refinancing rate, deposit facility rate, marginal lending facility rate), but it went beyond what market expected both in terms of the PEPP program, as well as in other ways that took markets by surprise.
Extended the PEPP Envelope
The Euro popped higher right from the moment the ECB announced its decisions – it did not wait for the press conference to see the details. The reason for the bounce was the ECB announcing EUR600 billion extension for the PEPP program, a hundred billion more than what was priced in the market.
Yes, this is a measure destined to ease the monetary policy, so it should have been negative, or dovish for the Euro. But the currency market is formed out of currency pairs, and exchange rates show the value of one currency in terms of another. When all central banks do the same thing, the currency pairs move based on the investors’ perception of what is positive or negative for the overall economic stance.
In this case, the Eurozone benefits from additional funds to fight the health crisis, and the markets interpreted the ECB news as a proactive measure that, in the end, will help companies and the economy recover quickly. So the Euro bounced.
Further Surprises from the ECB
Another surprise from the ECB was the announcement that it is reinvesting the proceeds from the PEPP program. This is an especially important step the ECB took in the sense that it allows the central bank to deviate from the capital keys during the PEPP program and help the countries more in need of funding.
Also, by extending the PEPP program by June 2021, the ECB set the stage for a longer period of accommodative rates. Basically, it signaled to markets that it is here to close the spreads – and the markets got the signal.
German Fiscal Stimulus
The EURUSD broke above 1.13 on Thursday, and all Euro pairs traded with a bid tone. They were already bid due to the German fiscal stimulus package announced a day earlier – a further sign that Europe is acting together to fight the pandemic.
As we enter summer trading conditions, the focus will slowly shift towards how emerging markets cope with the expanding pandemic and the upcoming presidential election in the United States. But the Euro broke higher and is likely to have a bid tone as long as the ECB continues on the same path, while the Fed signals further easing.
