Lagarde speech: ECB ramps up its bond-buying programme

  • European Central Bank (ECB) steps up its bond-buying programme to support euro area economic recovery
  • The EU’s laggard Coronavirus vaccine rollout is threatening the Eurozone economy’s recovery outlook
  • British pound to euro (GBP/EUR) exchange rate rangebound at EUR 1.16
  • Pound Sterling (GBP) slides against the Australian and Canadian dollars

European Central Bank (ECB) President Christine Lagarde delivered her comments on the central bank’s monetary policy outlook for the Eurozone economy in a press conference following the ECB’s interest rate decision.

ECB policymakers decided to leave policy settings unchanged. Still, they ramped up the central bank’s bond-buying programme to limit the economic pressure of rising yields and keep borrowing costs low across the Eurozone.

The ECB forecasts the Consumer Price Index (CPI) rising to 1.5% in 2021 versus predictions made in December 2020 of a jump to 1%.

While policymakers refrained from expanding the central bank’s EUR 1.85TN quantitative easing programme, President Lagarde said they stand ready to make any adjustments to their instruments if it becomes necessary to ensure a sustained increase in inflation.

During the press conference, Lagarde commented on the risks that current rising market interest rates pose to the ECB’s financial conditions and stressed the importance of maintaining bond flexibility to support economic recovery.

The EU’s notably slow vaccine rollout has given way to fears that Eurozone recovery will lag behind other leading economies such as China, the United States and the UK, which has acted as a headwind for the euro (EUR) in recent months.

While some of President Lagarde’s comments led to further confusion, rather than clarity, news that the ECB is stepping up its bond-buying programme caused an immediate reaction in financial markets.

The euro (EUR) advanced by more than 0.3% versus the US dollar (USD), and the currency pair remains well above the USD 1.19 level heading into the North American session.

However, this could be more to do with improved risk sentiment than EUR strength, as recent data from the US has eased inflation concerns.

The EU’s stubbornly high COVID-19 infection rate also limits the single currency’s upside potential, with the spread of new variants and lockdown extensions expected to weigh on euro area economic activity in the near-term.

Although Eurozone’s economic situation is expected to improve into 2021, the pace of recovery is dependent on the speed of vaccine rollouts which have been painfully slow in the EU.

Eurozone’s economic uncertainty could prompt further ECB action

During the ECB press conference, Christine Lagarde noted that Eurozone gross domestic product (GDP) was likely to contract during Q1 2021 as the coronavirus pandemic has forced many governments to extend containment measures and reintroduce lockdowns.

Although she expects economic activity to rebound and inflation to increase over the medium-term, she warned, “the ongoing spread of virus mutations and its implications for economic and financial conditions continue to be a source of downside risk.”

The ECB President also commented on the recent movement in euro (EUR) exchange rates and said policymakers would continue to monitor EUR developments as this could pose “possible implications to the medium-term inflation outlook.”

After a stellar performance in 2020, the single currency has slipped against a host of major currencies in 2021, with the ECB’s comments about EUR strength increasing disinflationary pressures cited as the prime reason for declines.

However, rising yields have quickly overshadowed the euro’s (EUR) strength as the most prominent threat to ECB’s 2% inflation target. While financial markets have welcomed the central bank’s bond-buying decision, future policy will also be influenced by the number of vaccination administered and the speed at which economies can reopen.

Quilter Investors Portfolio Manager Hinesh Patel said: “We suspect the ECB may be in for a nasty shock in later months as the reopening pace is less than expected, and demand from China and the US fails to leak into Europe; in sufficient quantity.”

With recovery expectations for the Eurozone darkening, while other economies such as the US and UK are tipped to have a strong recovery this year, the euro’s (EUR) gains may well be short-lived.

US dollars, euros and pound Sterling

GBP/EUR slips following Largarde speech

After several attempts to breach the EUR 1.17 level, the British pound to euro (GBP/EUR) exchange rate has tumbled following the ECB’s statement on future monetary policy and is trading flat at EUR 1.1673.

Pound Sterling’s (GBP) strength, driven by the UK’s vaccination programme and Bank of England (BoE) Governor Andrew Bailey’s dismissal of negative interest rates, has been a prime cause of momentum in GBP/EUR over the last three months.

GBP/EUR has advanced by almost 6 cents in 2021, having opened at EUR 1.11328 and briefly hitting a high of EUR 1.17078 on February 24th.

While the currency pair is trading on the backfoot on Thursday, most investors have ramped up bets for further pound Sterling (GBP) upside against the euro (EUR).

However, GBP could remain under pressure in the near-term with UK GDP data and IHS Markit Manufacturing and Industrial Production PMI’s out on Friday.

A recent survey also revealed that nearly three-quarters of UK firms had suffered delays due to new trade rules, giving way to increased caution over the UK’s economic outlook, especially as Brexit complications are likely to persist throughout the year.

Concerns over Brexit and upcoming economic data releases have also caused the UK currency to come under pressure against the riskier Canadian dollar (CAD) and Australian dollar (AUD).

GBP softer ahead of UK economic data releases

The British pound to Canadian Dollar (GBP/CAD) exchange rate has tumbled by 0.2% to CAD 1.7542 heading into New York trading hours due to a combination of improving global risk appetite, negative UK GDP expectations and comments from the Bank of Canada (BoC).

BoC policymakers opted to leave interest rates unchanged during Thursday’s monetary policy statement and delivered a relatively upbeat assessment on Canada’s recovery outlook.

During the BoC’s rate statement, the central bank said that the Canadian economy was proving to be more resilient to the second COVID wave and hinted at tapering asset purchases due to the improving outlook.

Although declining coronavirus cases, hospitalisations and fatalities are supporting GBP, the passage of President Joe Biden’s USD 1.9TN stimulus package is boosting riskier assets.

The British pound to Australian dollar (GBP/AUD) exchange rate plunged by -0.4% in the wake of the news and remains depressed at AUD 1.7979.

The latest Aussie consumer inflation report has also given AUD a boost, as the publication beat forecasts and jumped by 4.1%, courtesy of the country’s optimistic prospects.

AUD traders will be eyeing tomorrow’s release of Australian HIA New Home Sales data, which could drive GBP/AUD lower if the figures support the Australian economy’s outlook.