Thursday’s ECB monetary policy decision is closely watched by all market participants. Central banks around the world strongly reacted to the coronavirus health crisis by adding liquidity to a gripped financial system. This week the ECB is expected to go one step further.
Last week’s announcement that the European Union will issue common debt sent the Euro higher across the board. The recovery fund proposal raises EUR 750 billion from financial markets over a thirty-year period, starting with 2028. The triple-A-rated bonds are the first issuance of joint common debt in the Euro area and set the stage for further fiscal integration.
The move was welcomed by European institutions and investors alike. Suddenly, Europe has a strong international financial presence backed by common debt – Never before such a thing existed since the European Union’s creation.
Key ECB Meeting on Thursday
The ECB press conference on Thursday will highlight the steps the central bank took so far and will focus on the new ones. Regardless of what the central bank will do in terms of further easing the monetary policy, the market participants will want to know if Christine Lagarde and the Governing Council endorse the common debt issuance. All signals so far indicate that they will – which should further boost the Euro.
Among the measures expected to be announced, a couple of them are of particular importance. The first one refers to the PEPP (Pandemic Emergency Purchase Programme), and the expectations are that the ECB will extend it by another EUR 500 billion to reach EUR 1.25 trillion. The second one refers to expectations that the ECB may start reinvesting the PEPP securities. In both cases, it shows that the ECB is proactive, willing to ease the monetary conditions to help economies recovering from the coronavirus crisis.
For the EURUSD exchange rate, this is a crucial week. The pair consolidated for most of the health crisis so far – since March, it struggled to break below 1.08 or above 1.10.
Last Friday, however, it closed above 1.11, indicating that a breakout may already occurred. If the ECB delivers on the expected measures and endorses the joint debt announcement from last week, the EURUSD has room to advance, as the yield curve difference and market positioning suggests.