How Much Can Euro Rise After ECB?

Bank Note, Euro, Bills, Paper Money

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Euro resumed its rise against the US dollar after the European Central Bank boosted asset purchases on Thursday. Having telegraphed their plans to ease as far back as October, today’s decision was widely anticipated. In yesterday’s note, we argued that unless their actions were more aggressive, EUR/USD could see a post ECB rally.

EUR/USD traded higher but its gains were modest, reflecting the currency’s overstretched move. The central bank increased their Pandemic Emergency Purchase Program by $500 billion, right in the middle of the market’s $400 to $600 billion estimate. They also extended the program to March 2022 from the middle of 2021. Most market watchers were looking for an extension to the end of 2021 and maybe 2022. They also lowered their growth forecast for 2021 but raised their forecasts for 2020 and 2022. On inflation, they cut their projections for this year and 2022. These small but important adjustments tell us that the ECB on balance is less pessimistic but still plan to keep monetary policy easy for a very long time. This is especially true with ECB President Lagarde’s comment that they may not need to use the entire PEPP envelope.

EUR/USD snapped a 4-day decline to trade as high as 1.2159, just under the 50% Fibonacci retracement of May 2014 to January 2017 decline. If it breaks above 1.2170 the next stop could be the April high of 1.2414. Between some ECB optimism, mostly better data, declining virus cases and broad-based US dollar weakness, EUR/USD has fundamental support for further gains.

Meanwhile, investors continued to sell US dollars as weekly jobless claims surge to 853K. This is the highest level since September 19th and reflects the effects of recent lockdowns. Consumer prices rose 0.2% which was more than expected but as we noted, inflation is very low and a small uptick won’t affect Federal Reserve policy. Producer prices and the University of Michigan consumer sentiment index are due for release tomorrow. The rise in virus cases could dampen sentiment but any declines may be small considering positive vaccine news.

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