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On last Thursday (ECB monetary policy presser), the ECB President Lagarde said on any discussions of change in ECB policies like PEPP, APP, LTRO, negative rate tiering- the ECB is quite confident about the efficacy of its pandemic QQE as it has ensured more than sufficient liquidity with ultralow borrowing costs. Thus the ECB will continue its current policy tools and intended to use the full envelope of PEPP; i.e. the ECB has no intention to increase its QE in the foreseeable future. Overall, the EU has employed almost 20% of fiscal stimulus (including credit guarantee), which may help a speedy recovery.
On PEPP and inflation goal, Lagarde virtually said it’s the ECB bazooka and as the ECB already increased the PEPP size in June, it will take care of everything. Lagarde also clarified that the ECB has not discussed any expansion of the envelope of PEPP.
On Fed’s new inflation and employment targeting strategy, Lagarde said like the Fed, the ECB will also resume its strategy review process soon, which was paused due to the COVID-19 pandemic. Lagarde also signaled the strategy will focus more on inflation targeting mechanism:
Clearly, we have noted – as you have – that the dual mandate price stability and employment that the Fed pursues have been revisited. You have commented upon it and we have taken good note of those changes. As far as we, at the ECB, are concerned we had started our strategy review just like the Fed. We pressed the pause button during the time of the highest level of the pandemic crisis.
We will cover topics like inflation measurements; that's an important one that is often debated. That's coming up on September 23rd. We will also work on the ECB's price stability objective, as I said earlier. It's one of our key focuses.
On Eurozone deflationary trend, Lagarde pointed out the Aug inflation reading of -0.2% may be a temporary shock due to lower energy prices, reduction of German VAT, subdued consumer demand, and some COVID-19 disruption factors. But it’s not a trend in the medium term and the ECB is quite confident there will be no Eurozone deflation.
Lagarde was asked about the ECB plan about the structural change in the economy due to COVID-19 as the consumer-facing sectors like retail, travel and leisure are now in stress, while techs, eCommerce, and healthcare getting a thrust. Lagarde said the combination of monetary and fiscal stimulus will take care of the corona disruption/recession.
On Brexit risk, Lagarde said the ECB has projected downside risk for Brexit, but it certainly hopes that the Brexit will be positive despite recent narrative (by Johnson & Co).
On the issue of divergent corona economic carnage and recovery across the Eurozone, Lagarde said it’s a reality considering the varied degree of corona carnage, fiscal space and the strength of the banking sector. But the EU recovery fund, containing significant grants along with ECB’s PEPP will ensure an orderly recovery post-COVID-19:
There may not be too much policy divergence between ECB and Fed as both will run pandemic QE till at least H1-2021 (COVID-19 vaccinations) and thus the ECB may resort to bolder forward guidance (jawboning) to ensure that EURUSD does not stay above 1.20-1.25 redline levels for the sake of export-heavy Eurozone economy. Both ECB and Fed or even BOJ will not further increase their pandemic QQE. And the ECB may also incorporate Fed’s dual mandate; i.e. average inflation targeting strategy (as a price stability mandate) coupled with maximum employment (as a new strategy) to change the goal post to be at ZIRP/NIRP forever!!
Technical View: EURUSD (as updated on 02/09/20)
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