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ECB Tapers QE: Euro Falls against Pound Sterling

ECB and the Euro

Image © European Central Bank, reproduced under CC licensing

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The Euro fell against the Pound after the European Central Bank (ECB) met investor expectations and said it would lower the pace of its pandemic era quantitative easing programme.The decision was expected and one analyst describes the overall message from the central bank as "fairly dovish".

"Favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters," The ECB said in a statement.

This is in effect the ECB signalling it will lower the amount of bonds it buys as part of its coronavirus quantitative easing programme, commonly referred to as a 'taper'.

The general rule of thumb in FX is that a taper is supportive of a currency; but for the Euro to have really push higher perhaps a more agressive stance was required.

"Markets will take this news in their stride as a result of already being largely discounted," says Hinesh Patel, portfolio manager at Quilter Investors. "Whilst this is tapering, to some extent the main support programmes are still in place to support 'disorderly' markets should we have an adverse shock."

Euro rates following ECB call

Above: Pound-Euro (top) on Sept 09., with Euro-Dollar bottom.

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The Governing Council will continue to conduct net asset purchases under the PEPP with a total envelope of €1,850BN until at least the end of March 2022.

All other settings were left unchanged.

"This is priced in," says Viraj Patel, FX and Macro Strategist at Vanda Research.

Patel says the broader communication was "fairly dovish" and there is no sign the ECB wants to rush towards raising interest rates.

"The statement balances the council doves & hawks... but disappoints markets expecting a more hawkish ECB," says Patel.

The ECB says it's "symmetric two per cent inflation target" will allow for it to defer raising interest rates even with inflation now above the 2.0% target.

In a press conference following the announcement ECB President Christine Lagarde said that the ECB had raised inflation targets slightly upwards, but in the medium-term they remain below the 2.0% target.

The ECB's released new inflation forecasts that saw an upgrade for 2021 to 2.2% from 1.9% previously.

The 2022 forecast goes to 1.7% from 1.5% previously and the 2023 forecast is lowered from 1.5% to 1.4%.

Until the ECB signals the medium-term targets are at or above 2.0% the conditions for a rate hike will have not been achieved, suggesting scant chance of an ECB hike in the next two years.

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The initial reaction of the Euro reflects that disappointment with some losses being recorded against the Dollar.

But against the Pound losses were more excessive at a third of a percent.

To be fair, the Pound-to-Euro exchange rate had been climbing steadily through the morning following the London market open.

The pair topped towards 1.1682 before falling back, but the ECB statement allowed the pair to recover back to this level.

The ECB raised their economic forecasts for 2021 to 5.0% from a previously held estimate for 4.6%.

But the 2022 forecast is lowered to 4.6% from 4.7% previously while the 2023 forecast remains at 2.1%.

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