EUR/USD: vulnerable euro retreats after the dovish ECB minutes

EUR/USD: vulnerable euro retreats after the dovish ECB minutes

  • The EUR/USD pair declined after the ECB released minutes of the meeting held earlier this month.
  • The committee left the deposit rate facility unchanged at -0.50% and the marginal lending facility at 0.25%.
  • The bank also pledged to continue with the quantitative easing for as long as needed

The EUR/USD pair dropped by more than 50 basis points as investors reflected on the minutes of the past ECB meeting. Also, the decline was partly because of the overall weakness of the US dollar, which rose by 35 basis points.

ECB Minutes
EUR/USD falls after the ECB minutes

EUR/USD reacts to ECB minutes

The euro weakened against its major peers after the ECB released the minutes of its meeting held earlier this month. The euro index, which measures the strength of the euro against a basket of currencies, dropped by 0.30%.

The minutes started with the overview of the financial market. The officials debated the widening sovereign bond spreads relative to the German bunds. The most affected bonds were from highly indebted countries like Spain and Italy. After the meeting, the spread narrowed because of the financing agreement reached by Macron and Merkel.

The members also debated the impacts of the pandemic emergency purchase programme (PEPP) to the corporate sector. In this, they also talked about the dislocation of the stock market and the overall economy. While the outlook of the economy has been dark, the stock market in most European countries has been soaring.

In the next session, the members debated the global environment and the euro area. On the latter, they noted that the economy had contracted by 3.8 per cent quarter on quarter due to the lockdowns. They also predicted that the second quarter will be worse. As a result, the members now believe that the region’s GDP will drop by between 5% and 12% this year.

ECB stands firm on QE

In total, the members agreed to ease the conditions of the targeted longer-term refinancing operations (TLTRO 111). Further, they removed the cap of the 750 billion asset purchases at a pace of 20 billion every month. On quantitative easing, the statement said:

“The Governing Council was fully prepared to increase the size of the PEPP and adjust its composition, by as much as necessary and for as long as needed.”

In the meeting, the members decided to leave interest rates unchanged. They justified by saying:

“The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility would remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expected the key ECB interest rates to remain at their present or lower levels until it had seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon.”

The ECB minutes came a day after data showed that the region’s manufacturing and services activitywas improving. The manufacturing and services PMI rose to 39.5 and 28.7, respectively. This was better than the previous month’s 33.4 and 12.0, respectively.

EUR/USD technical outlook

EUR/USD
EUR/USD technical analysis

The EUR/USD pair is trading at 1.0900, which is slightly below the 50-day and 100-day exponential moving average on the weekly chart. Also, the volatility, as measured by the Average True Range (ATR) has risen to the highest level since 2017. Besides, the EUR/USD pair has been moving in a downward trend since February 2018. Therefore, there is a possibility that the downward trend will continue.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.

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