The ECB is still committed to implementing accommodative policies next year although it continues to reduce stimulus. EUR/USD has limited gains in response to this news.
The European Central Bank (ECB) announced stimulus cuts for its pandemic relief program (PEPP) on Thursday (16/December) this evening. However, the central bank remains committed to maintaining monetary stimulus until 2022.
Bond purchases under the PEPP will be cut once again and end in March 2022. However, the purchase of bonds under the Asset Purchase Program (APP) of 20 billion Euros per month will actually be increased. The goal is to bridge quantitative easing. Once PEPP is complete, the ECB will buy more bonds under the APP program worth 40 billion Euros in the second quarter, and 30 billion Euros in the third quarter.
"The Board of Governors assesses that the progress of the economic recovery and progress towards the medium-term inflation target has allowed for a step-by-step reduction in the pace of asset purchases over the coming quarters," the ECB's policy statement said tonight, "However, monetary accommodation is still required for inflation to stabilize at the target. 2% in the medium term."
Meanwhile, the ECB did not make changes to interest rates. The refinancing rate remains at 0%, as well as the interest on loan facilities and deposit rates which are maintained at 0.25% and -0.5%, respectively.
EUR/USD Slightly Up
Moments after the ECB announcement, the Euro rose 0.5% against the US Dollar. However, at the time of writing, EUR/USD's gain is only 0.21% and is trading at 1.1312. According to the analysis of Gurpreet Gill from Goldman Sachs, the euro bulls did not last long because the ECB's approach signal was still considered accommodative. Gill estimates that the ECB will only be able to raise interest rates in 2024, provided core inflation is stable at 1.5%.
According to Jane Foley of Rabobank, the ECB surprised the market with its relatively restrained measure of APP's monthly purchases, despite a dovish element in its statement regarding PEPP's reinvestment. Therefore, the current rise in EUR/USD is more due to the overbought US Dollar. "EUR/USD is pushing up. That partly reflects the fact that the market has been very long against the US dollar this week," said Foley.
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