In a seemingly counterintuitive move, the Euro has traded higher into the end of the week following the December ECB meeting held yesterday. As expected, the ECB added to its current easing measures. However, its headline rates, marginal lending rate and deposit rate were all kept unchanged at 0%, 0.25% and -0.50% respectively.

Bond Buying Increased

Instead, the ECB announced and expansion and an increase of its (Pandemic Emergency Purchase Programme) PEPP. The ECB announced an additional EUR 500 billion for the programme, taking the total amount up to EUR 1.85 trillion. The programme is now also due to run on until the end of March 2022 with reinvestments of maturing assets to run until the end of 2023.

TLTROIII Recalibrated

Additionally, the ECB also chose to “recalibrate” its TLTROIII operations by increasing the duration of the loans by a further 12 months to June 2022. Alongside this, the ECB also extended the amount that counterparties are entitles to borrow under the TLTROIII operations from 50% to 55% of eligible stock loans. However, these new conditions will only be available to banks which meet specified performance targets.

Looking ahead the ECB acknowledged that uncertainty remains high and said: “The Governing Council therefore continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.”

ECB Monitoring But Not Targeting Exchange Rate

Commenting on the exchange rate specifically, the Lagarde said that the bank would “continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook.” During the press conference following the meeting, while saying that the bank does not target the exchange rate, Lagarde did say: “But clearly the exchange rate, and in particular the appreciation of the euro, plays an important role and exercises downward pressure on prices, so we monitor it, we will continue to monitor it very carefully going forward.”

The market reaction will likely be disappointing for the ECB given that the Euro has risen against its main trading counterparts in the wake of the meeting likely as a result of traders having expected more out of the bank.

Technical Views

EURGBP

The rally in EURGBP this week has seen price trading back up above the .9097 level with price now quickly approaching a further retest of the broken bullish channel. If price break back into the channel, the attention will then turn to the .9311 level next which is the next structural resistance to note.

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