EUR/USD Rate Forecast: Euro Rebound Emerges After Defending 2021 Low

EUR/USD bounces back from a fresh weekly low (1.1992) as the ECB scales back the pace of the pandemic emergency purchase program (PPEP) for the third consecutive week, and the decline from the January high (1.2350) may turn out to be a correction in the broader trend rather than a change in behavior as the Governing Council appears to be on track to retain the current course for monetary policy.

Image of ECB balance sheet

Source: ECB

The latest figures from the ECB showed the central bank’s balance sheet increased by EUR 16.9 billion under the PPEP, which compares to the EUR 18.3 billion rise in the week ending February 19, and it seems as though the Governing Council will rely on its current tools to support the monetary union as Chief Economist Philip Lane insists that “the central bank is committed to recalibrating its underlying policy instruments if it detects any threat to the favourability of financing conditions.”

However, ECB board member Fabio Panetta warns that “the risks of providing too little policy support still far outweigh the risks of providing too much” while speaking at a virtual event hosted by the Bocconi University, with the official going onto say that “by keeping nominal yields low for longer, we can provide a strong anchor to preserve accommodative financing conditions.”

Nevertheless, Panetta acknowledges that “there is a good chance that a recovery will take hold in the latter part of this year” as European authorities prepare to distribute the Next Generation EU (NGEU) program in 2021, and it seems as though the Governing Council is in no rush to alter the path for monetary policy even as Panetta argues that “the steepening in the nominal GDP-weighted yield curve we have been seeing is unwelcome and must be resisted.”

As a result, the ECB may continue to endorse a wait-and-see approach at its next meeting on March 11 as President Christine Lagarde emphasizes that “our preferred tool is the pandemic emergency purchase program (PPEP),” and EUR/USD may reflect the bullish price action seen in 2020 as the Federal Reserve stays on track to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month.”

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