EUR/USD: ECB to cap gains on the lack of inflationary pulse – Westpac

The European Central Bank (ECB) is expected to extend the Pandemic Emergency Purchasing Programme (PEPP) and TLTRO accommodation and jawbone against EUR strength if staff projections outline even less inflationary pulse, capping EUR gains.

See – European Central Bank Preview: Forecast from 10 major banks

Key quotes

“The ECB meeting will receive updated staff economic projections. Despite an encouraging 3Q recovery, near-term profiles will be marked lower due to increased regional restrictions in 4Q and underscore the lack of any inflationary pressures. This should ensure a widely expected expansion of the PEPP by EUR500-EUR650 B. It is also likely to be extended by at least 6 months if not 12 months whilst other purchasing programme envelopes are likely to remain in place. The ECB is also expected to extend the duration of its TLTRO favourable funding programmes from 3 to 5 years. This extensive forward liquidity and forward guidance on low rates may well be accompanied by jawboning around the recent rise in EUR/USD.” 

“The EC’s final Summit of 2020 takes place on Dec 10th-11th with hopes of gaining support for the 7yr Budget and delayed Recovery Fund. Additionally, EU-UK trade negotiations are at a critical stage. Although failure to reach an agreement this week is likely to mean WTO trading in January, it is still likely that there will be ongoing attempts to gain a post-transition trade deal.” 

“EUR/USD should find solid 1.18-1.20 support, but is also likely to be capped around 1.23-1.24 into 2021.”