EUR/USD vicious rally accelerates as ECB rumps up its money printers

The EUR/USD pair rose today after the European Central Bank (ECB) delivered its interest rate decision. The pair is down by 0.35% and is trading at 1.1200, while the euro index increased by 20 basis points.

ECB interest rate decision

The EUR/USD roseafter the ECB delivered its interest rate decision. The bank left the deposit rate facility unchanged at -0.50% and the marginal lending facility at 0.25%. That was in line with what most analysts were expecting. It expects to leave rates unchanged until inflation hits its target of 2%. This will be a toll order since the eurozone is close to deflation.

The bank also announced that it was increasing the quantitative easing program from the previous €750 billion to €1.3 trillion. This was in line with what most analysts, including those from Principal Global Investors and MUFG were expecting. In the statement, the bank said that the new addition will help to support the economy in a time when the situation is difficult.

At the same time, the ECB extended the period of the purchases from the previous January 2021 to June 2021. In a statement, the bank said:

“Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year.”

Eurozone improving

The ECB rate decision came at a time when the eurozone’s economy was improving. According to Markit, the services and manufacturing PMIs improved slightly in May after crashing in the previous month.

Analysts polled by Bloomberg expect the recovery to accelerate as more countries start to reopen. To date, most countries, including Germany, Italy, and France, have started to ease the restrictions put in place a month earlier.

The decision also came a week after the European Commission announced a giant $826 billion funding proposal. Most countries will receive the funds and use it to aid their ailing industries. Most of the funds will go to countries like Italy, Spain, and France.

In its proposal, the commission said that it will increase some taxes to pay back the money. For example, it will expand the so-called carbon market, increase taxes to big technology companies, and introduce higher taxes to industrial companies that generate a lot of carbon.

Still, the biggest risk is that most countries in Europe have increased their debt significantly. For example, the highly indebted Italy has added more debt into its books. According to estimates, the debt to GDP ratio will jump to 160%, which is enormous. Other countries like Spain, France, and Cyprus have also increased their debt significantly.

Another key risk is that the recovery will take more time. Analysts, including Christine Lagarde, expect the economy to shrink by between 8% and 12% this year. She has also dismissed the idea of a V-shaped recovery.

EUR/USD technical outlook

On the daily chart, the EUR/USD pair is in eighth day of straight gains and is trading at 1.1271. The price is slightly below the 78.6% Fibonacci retracement level and is also above the 100-day and 50-day exponential moving averages. Therefore, the pair will likely continue rising as bulls attempt to test the 78.2% retracement at 1.1315.