Euro: ECB Takes the First Step and Slows Down Its PEPP


September 9, 2021, | AtoZ MarketsThe European Central Bank has decided to keep interest rates unchanged but mentioned that it will maintain a moderately lower pace of net asset purchases under the emergency purchase program (PEPP) than in the previous two quarters. Read here how this affected the euro.

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25%, and -0.50% respectively, noted ECB.

What Is the Pandemic Emergency Purchasing Program (PEPP)?

Due to the pandemic, the European Central Bank decided to inject money to strengthen its economy and try to minimize the economic effects of Covid-19.

Under this program, net asset purchases with a total value of EUR 1,850 billion are being made until at least the end of March 2022. Also, the ECB has said that it will do so until it considers the Covid crisis phase to be over.

In addition, the Governing Council has said that it will continue to reinvest payments on securities purchased at maturity under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate stance of monetary policy.

How Are the Finances of Europe Today?

The GDP-weighted euro area and German ten-year sovereign bond yields decreased by around 15 basis points to -0.01% and -0.40%, respectively.

Despite continuing progress in the COVID-19 vaccine roll-out and the release of overall positive survey indicators, long-term rates declined against the background of concerning news about the spread of the Delta variant of the coronavirus.

Euro area non-financial stocks declined by around half a percentage point and overall continue to stand above their pre-pandemic levels.

What About the Euro in the Forex Market?

In foreign exchange markets, the euro depreciated in trade-weighted terms in June and July.

The euro depreciated against the US dollar (by 3.3%), mainly reflecting the widening of the short-term interest rate expectations differential between the euro area and the United States.

In addition, weakened against other major currencies, including the Chinese renminbi (by 2.1%), the Japanese yen (by 2.8%), and the Swiss franc (by 0.6%), as well as against the currencies of some major emerging market economies.

Also, the euro continued appreciating against the currencies of several non-euro area European Union Member States in June and July, including the Hungarian forint (by 4.1%), the Polish zloty (by 2.6%), and the Czech koruna (by 1.2%).

August Was in the Red for the European Currency

Investors kept the euro in the red against the dollar, and the EUR/USD closed last month with a decline of almost 60 pips on the price chart.

The price faced the zone of the exponential moving average of 60 months in 1.1660, and from there, investors remain undecided on the new movements of the price.

September has started in the 1,1807, and currency traders are holding the price around the 1,1820 with no major reactions after the ECB meeting.

However, during this month we must be alert to the possibility of a breakout of the uptrend line that has been in place since March 1 of this year, and which had a new rupture attempt last August.

In terms of fundamental analysis, the issue of European inflation is key to the euro’s performance over the coming months.

Eurozone inflation hit a decade-high 3% in August, and GDP in the 19-member bloc’s common currency rose 2% in the second quarter, beating economists’ expectations.

Likewise, ECB policymakers have expressed opposing tones regarding the danger of inflation becoming persistent rather than “transitory,” as has been the consensus among central banks around the world.

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