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ECB Analysis: Why Lagarde’s short-term fix is lose-lose for the euro

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  • The ECB has left its policy unchanged and vowed to ramp up bond-buying next quarter.
  • Potentially lower European yields may weigh on the currency.
  • The lack of commitment to longer-term support means fewer funds for the economy. 

Christine Lagarde’s largesse is gone – at least for the long-term – and that is bad news for euro bulls. European Central Bank President Christine Lagarde has overseen an announcement to expand bond-buying in the second quarter.

That pledge has come after the bank surprisingly purchased fewer bonds in recent weeks – a surprise given officials’ complaints about rising yields. If the bank indeed ramps up its bond-buying activities and returns on debt fall, that could weaken EUR/USD. On the other side of the Atlantic, the Federal Reserve accepts higher yields as a sign of better growth prospects. This gap is favorable for the dollar.

On the other hand, the Frankfurt-based institution has left its total Pandemic Emergency Purchasing Program (PEPP) unchanged at €1.85 trillion. Moreover, the ECB has kept the door open to buying less – saying the “envelope” may not fully be used. Keeping a cap on total buying and adding a dose of confusion does is another negative for the common currency.

During the covid crisis, the euro advanced each time the ECB expanded its total buying. Contrary to pre-pandemic logic, more monetary funds are now seen as allowing governments to buy more and boost growth – thus positive for the economy and the currency.

The bank also noted that risks have become more balanced, thus showing more reluctance to expanding it in the future.

Europe continues struggling with coronavirus, a growingly frustrating vaccination campaign, and a sluggish rollout of fiscal support. While the ECB is not the only game in town anymore, it seems to hold back on additional support.

All in all, the bank’s stance is a lose-lose for EUR/USD. 

The move is minimal in the short term and could snowball the next time the US yields edge higher.

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