- The ECB has left its policy unchanged but has upgraded its language.
- Characterizing risks as balanced, while providing more support are among the positive factors.
- EUR/USD has room to rise in response to the bank’s moves.
Euro boom? Not so fast, as everything is slower in Europe, but the European Central Bank has acknowledged improving conditions in its subtle manner. Christine Lagarde, President of the ECB has released three relevant statements that may keep the euro bid – and potentially send it to new highs.
Here are four positive factors:
1) Risks balanced
Even during the time of Mario Draghi – Lagarde’s predecessor and now Italy’s premier – the ECB said that the risks are tilted to the downside. The change, for now, is subtle. While the Frankfurt-based institution still sees short-term risks as somewhat unfavorable, it now says that in the medium term, the risks are balanced.
The upgrade stems mostly from vaccines, which have accelerated in Europe, but also due to an increase in global demand. It seems that European policymakers are content with America’s economic boom. Risks come from a potential resurgence of the virus and its variants.
2) Firm rebound
The ECB acknowledges that stronger growth is coming, albeit it does not use the strongest possible words. Nevertheless, Lagarde mentioned that while the economy likely contracted in the first quarter, there are signs that the more sensitive services sector is on holding up. Moreover, the second quarter is likely strong.
Strong growth and the eurozone seem like an oxymoron to some, but the old continent may experience significant expansion for a change.
3) Inflation likely to increase
Also here, the caveats come first – the recent rise in consumer prices comes from “idiosyncratic” factors that may prove temporary, according to Lagarde. However, she added that inflation will likely increase in the coming months – and may stay higher once the pandemic fades.
As the ECB is officially only responsible for inflation, this upgrade is significant.
4) No phasing out of PEPP
The bank repeated its pledge to ramp up its bond-buying scheme via the Pandemic Emergency Purchase Program (PEPP) during the second quarter, which would allow governments to boost the economies. Moreover, in an answer to a question, Lagarde said the Governing Council did not even discuss phasing out the PEPP program, meaning it has a long way to go. She classified such talk as premature.
While the US Federal Reserve’s dollar printing weighs on the dollar, the ECB’s euro creation is taken differently – as boosting growth rather than devaluing the currency.
Conclusion
The ECB is acknowledging the improving outlook while maintaining its support. That is a Goldilocks scenario for the common currency.
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