ECB Quick Analysis: Tapering still leaves Lagarde as the laggard, EUR/USD could turn down

ECB Quick Analysis: Tapering still leaves Lagarde as the laggard, EUR/USD could turn down
  • The ECB has announced the end of its special PEPP bond-buying scheme in March.
  • Raising the volume of the APP scheme is limited and set to be reduced.
  • Other central banks remain well ahead of the ECB, potentially limiting the euro's rise.

A wise owl – that is what European Central Bank Christine Lagarde aspires to be. Her latest move seems to have met that desire, as the ECB all but tapers its bond-buying schemes, following others' footsteps.

The Frankfurt-based institution will wind down its Pandemic Emergency Purchase Program (PEPP) in March 2022, two years after its launch. On the other hand, it will expand its regular Asset Purchase Program to €40 billion in the second quarter – but already pre-announced it would squeeze to €30 billion in the third quarter. In other words: tapering.

Buying fewer bonds and creating more fewer euros is positive for the common currency, and that explains the 30-pip jump. However, the ECB has stiff competition.

The move comes just the Federal Reserve's decision to double its tapering pace to $30 billion/month and projection of three hikes in 2022. The Bank of England surprised markets by announcing a 15bp rate hike – just 45 minutes ahead of the ECB.

In the second quarter of 2022, the ECB would still be buying bonds while the Fed would already move toward raising rates and the BOE could be after its second or third move. Investors are unlikely to wait for that to happen before acting.

The euro's relative disadvantage does not solely stem from central banks' intentions but from the underlying economic situation. The ECB continues labeling inflation as transitory, and for good reasons. Core inflation is roughly half that in the US, and skewed to the upside by German VAT changes. Europe is more economically sensitive to covid than the US.

These gaps, which brought EUR/USD down in recent months, could return to push EUR/USD lower. This current advance could turn into a selling opportunity.

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