ECB Quick Analysis: Where is Lagarde's largesse? Failure to add QE may send EUR/USD tumbling
|- The ECB left its QE plan unchanged and only said it may increase them.
- Several tweaks in its policy are insufficient to convince investors.
- EUR/USD has significant room to fall, especially if spreads continue widening.
The European Central Bank has had its say – by leaving the bond-buying program unchanged, far from what is needed. The ECB has disappointed investors and the euro may suffer. The Frankfurt-based institution left the PEPP bond-buying scheme unchanged at €750 billion and only said it is ready to increase it and let it run through the year-end. That is insufficient amid the rapid pace of deploying funds and the gravity of the situation, as data has shown.
The ECB announced the Pandemic Emergency Purchase Program (PEPP) in an emergency meeting on March 18 and the money is running out fast. The bank's front-loading – to alleviate investors' fears about government funding issues – implies that funds will run out around October.
Earlier, eurozone Gross Domestic Product figures were grim. The Italian economy shrank by 4.7% in the first quarter the Spanish economy shrank by 5.2%, and the French one by 5.8% – the worst contractions since Word War II. As a whole, the euro area's output plunged by 3.8%, worse than expected, and is still prone to revisions once Germany's data is out. Moreover, there is no doubt that the second quarter will be far worse.
PELTROs: The ECB did announce a serious of tweaks, including easing lending conditions to banks on condition of them borrowing them to the real economy. One of the new programs is called pandemic emergency longer-term refinancing operations (PELTRO). This new addition to the bank's alphabet soup is only a minor change and far from enough. The bank also failed to pledge that it would enlarge the program in June when staff release new forecasts.
The verdict in debt markets is swift – the spread between Italian and German bonds is rising as investors are disappointed.
Growing funding pressures by hard-hit countries may exacerbate the falls in EUR/USD. Targets include 1.0850, 1.0810, and 1.0770.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.