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ECB meeting minutes could be uneventful for the euro


14 May 2021

The European Central Bank will release the minutes from April’s meeting on Friday at 11:30 GMT providing a detailed explanation about its decision to hold its policy stable last month. The report is not expected to pull anything new out of the hat, but investors could still go through the text to detect any signs that policymakers are willing to start monetary tightening dialogues.

PEPP purchases boost not enough to stop yield rally

During April’s policy meeting, the ECB left its deposit facility rate steady at a record low of -0.5% and its asset purchases unchanged as expected. Following the March initiative, the central bank also reiterated that bond purchases under the Pandemic Emergency Purchase Program (PEPP) “will continue to be conducted at a significantly higher pace than during the first quarter” but within the envelope of 1.85 trillion euros until at least March 2022 “and, in any case, until the Governing Council judges that the coronavirus crisis phase is over” in order to address the rise in bond yields and keep borrowing costs low.

Indeed, weekly PEPP purchases have been higher than those in the first three months of the year, but the addition looks barely a significant one and has done little to control the rally in bond yields so far. The German 10-year bund yield, although in negative area, continued to trend up, hitting a fresh three-year high of -0.119% on Wednesday after the US core Consumer Price Index (CPI) boosted global inflation fears.

Both the Fed and the ECB believe that any spikes in inflation measures will be transitory and could be an outcome of base effects from last year’s low prices, hinting that any monetary tightening this year would be premature. Currently, there is not enough evidence to prove the opposite, but given the fact that the ECB has a lower inflation goal of “below but close to 2.0%” than the Fed, which is willing to allow prices to rise above 2.0% for some time, questions are rising about whether the ECB will be as patient as the Fed is if the eurozone CPI surges beyond its target and holds above it in the second half of the year.

Inflation is not a concern in the eurozone but economic outlook gets promising

For now, inflation pressures are not a concern in the eurozone. The headline CPI has picked up steam to a three-year high of 1.6% y/y in March but has yet to show any extraordinary powers, whereas the core CPI, which excludes food and energy has reversed back to the downside, dropping from 1.4% y/y in January to 0.9%. Therefore, the ECB has a good reason for now to keep its policy accommodative and Friday’s minutes could underline the preference for maintaining a supportive policy to address economic vulnerabilities and constrain potential negative long-term effects from the pandemic. A quick tapering could result in a higher unemployment rate and a depressed inflation, whereas a continuous stimulus may hurt profit margins for the banks, which operate under negative interest rates, but could balance the large public deficits.

ECB minutes to reiterate the need for stimulus; communication style in focus

Hence, even though the minutes could just telegraph what is already known, investors would closely scan the minutes for any hawkish adjustments in the communication style and clues of division among policymakers, which will potentially open the phasing out discussions, especially if the recovery fund comes soon into play. Note that the number of pro-tapering policymakers have been increasing lately, with Latvia’s central bank governor Martin Kazaks saying last Friday that the central bank could reduce the pace of its PEPP purchases in June. The Dutch central bank chief also raised prospects of dialing it down before resuming his dovish tone.

Euro/dollar reaction

As regards the reaction in the euro, unless analysts detect any shifts in the writing style, the minutes are not expected to move the currency. From a technical perspective, however, if the 1.2068 support level holds firm against the US dollar, the euro may attempt to breach the 1.2145- 1.2175 resistance region and push above the restrictive line with scope to reach the 1.2265 barrier.

Otherwise, if the 1.2068 floor collapses, the 1.2000 mark could immediately come under the spotlight ahead of the 1.1950 level, where the 50- and 200-day simple moving averages are placed. Lower, the price could stabilize somewhere around 1.1875.

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