ECB Preview: EUR/USD longs may have gone too far for Lagarde

The European Central Bank (ECB) is set to add more stimulus via an expansion of some €500 billion in its bond-buying scheme but that is already priced in. For the euro to rise, the move would probably need to be larger. EUR/USD has room to fall if Lagarde warns about the exchange rate and especially if she hints at cutting rates, FXStreet’s Analyst Yohay Elam briefs.

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Key quotes

“Lagarde may say something along the lines of ‘we are closely monitoring the exchange rate’ to express the Governing Council’s dissatisfaction with the recent rise. While the ECB sticks to its message of not targeting the euro’s value, any hint would indicate policy may take the currency into account.” 

“The bank may take one step further and open the door to further rate cuts. Its deposit rate already stands at -0.50%, deep in negative territory, and it may hint at pushing it further down to -0.60% if needed. While setting sub-zero borrowing costs has arguably done little to boost the eurozone economy, it played a major role in depressing the euro.” 

“The expected expansion of the ECB’s Pandemic Emergency Purchase Program (PEPP) was supposed to be the focus of the December 10 meeting – until the recent rise in the exchange rate. Expectations stand at an additional €500 billion and an extension of PEPP beyond June 2021. The bank is also likely to expand its Targeted Long-Term Refinancing Operation (TLTRO) programs, which facilitate bank lending, and usually have little effect on markets.” 

“Apart from the recent jump in EUR/USD, the impact of an additional €500 billion is mostly priced in. It would probably take Lagarde and her colleagues to announce €700 billion or more in additional bond buys to excite investors. With the prospects of an upcoming vaccine, the hawks in Frankfurt may object to a generous outpour of money.”