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  • EUR/GBP managed to squeak out fresh weekly lows just under 0.8550 in wake of a more dovish than expected ECB.
  • However, the pair remains locked in this week’s rough 0.8550-80 range.

EUR/GBP is testing the bottom of its range over the last three session and just about managed to squeak out a new low for the week under 0.8550 in wake of a more dovish than expected ECB monetary policy decision outcome, though a convincing break below this level remains elusive and for now the pair is trading closer to the 0.8560 mark. If the pair were to break below 0.8550, a test of recent multi-month lows at just under 0.8540 seems highly likely.

Thus, it seems as though Thursday’s ECB meeting has failed to shake EUR/GBP out of its recent 0.8550-0.8580 range and, on the day, the pair trades flat. Perhaps UK GDP and industrial production data for the month of January, set for release on Friday morning, could provide the pair with some impetus before the end of the week. Failing that, a continuation of rangebound conditions seems likely with desks now of broadly of the view that comparatively positive expectations for the UK economy versus the Eurozone (driven by the country’s faster vaccine rollout) is now “in the price” when it comes to sterling.

Driving the day

A more dovish than anticipated ECB monetary policy decision was the main event and driver of price action on the day, with other news largely playing second fiddle in the eyes of market participants. For reference, however, there have been a few news stories worth noting; there has been some commotion in Europe amid the sudden onset of fear that the AstraZeneca vaccine might be linked to a few cases of serious blood clots and Danish, Austrian and Italian health authorities acted suddenly to halt their rollouts of the UK made vaccine.

However, European (and UK) health authorities have denied claims that there is a link between the vaccine and blood clots and EU Commission President Ursula von der Leyen and Italian PM Mario Draghi were just on the phone and reportedly agreed at the lack of evidence behind these claims, meaning Italy is likely to restart its AstraZeneca vaccine rollout imminently. Sticking with Eurozone vaccine news; the Johnson & Johnson vaccine just received emergency use approval in the EU and the bloc is reportedly looking at extending its vaccine export control mechanism until the end of June. Reportedly the bloc has also been informed not to expect any deliveries of the AstraZeneca vaccine from the US in the near future.

ECB Monetary Policy Decision Recap

As expected, the ECB opted to leave its monetary policy setting unchanged on Thursday, with the deposit rate left at -0.5% and the bank’s main QE programme (the PEPP) held at EUR 1.85T in total scope. In a reiteration of previous guidance, the ECB noted that purchases under the PEPP will continue until at least the end of March 2022 and, in any case, until the bank has judged that the Covid-19 pandemic crisis has abated. However, the bank noted that “based on a joint assessment of financing conditions and the inflation outlook, the ECB expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of the year”.

In other words, in response to the recent rise in global government bond yields, the ECB is going to up the pace at which it buys European government bonds in order to keep yields low and financing conditions accommodative – this was more dovish than market expectations, with most analysts not expecting an explicit commitment to a faster pace of bond purchases but rather something vaguer like, perhaps, a line saying that the ECB is monitoring bond yields and perhaps another line saying the bank is willing to use the flexibility of the PEPP in order to prevent any excessive tightening of financing conditions.

In the press conference, ECB President Christine Lagarde gave some more colour on the bank’s outlook for the Eurozone economy; Lagarde said the overall economic situation is expected to improve in 2021, although uncertainty amid persistently high Covid-19 infection rates and lockdowns, both of which continue to weigh on the economy in the short-term. As such, Lagarde characterised the risks to the Eurozone economic outlook as more balanced. The ECB’s updated economic forecasts conformed to this slightly more upbeat take on the economic outlook; the ECB now see 2021 GDP growth at 4.0% (versus forecasts for 3.9% in December), though expectations for 2022 growth was revised 0.1% lower to 4.1% and 2023 growth was left unchanged at 2.1%.

Meanwhile, Lagarde noted that the bank expects inflation to pick up modestly due to transitory factors and could even reach 2.0% by the end of the year. Hence, the bank is now forecasting inflation of 1.5% in 2021 versus its forecast for inflation of 1.0% in December. However, Lagarde expects underlying price pressures to remain subdued, something which was reflected in the fact that 2022 inflation was only upgraded 0.1% to 1.2% and 2023 inflation expectations was left unchanged at 1.4% – well below the ECB’s inflation target of close to but just under 2.0%.

Finally, Lagarde also commented on the ECB’s decision to accelerate the rate of weekly PEPP purchases over the coming quarter; she said that the ECB has no specific number in mind regarding weekly purchases. However, ECB sources that have spoken to the press since she wrapped up speaking suggest that ECB policymakers did agree on a monthly PEPP purchase target at the meeting, which is reportedly to be under EUR 100B but well above the EUR 60B in purchases seen in February. Moreover, Lagarde said in the press conference that the decision on the PEPP had been unanimous, though recent ECB sources suggest that there are differences of opinion on the board over whether the recent rise in bond yields needs to be completely unwound or not. Lagarde cautioned markets not to expected a big PEPP rise in the weekly purchase data release on Monday, given large redemption due on that day.