ECB Keeps Rates, PEPP Size Unchanged

The ECB keeps the PEPP purchases at a significantly higher pace when compared to the first months of the year. US inflation data, released at the same time as the ECB’s press conference, made it difficult to trade the EUR/USD pair.

The European Central Bank (ECB) delivered its interest rate decision yesterday and chose not to surprise the markets. At the initial announcement, which always comes out forty-five minutes before the press conference, the central bank announced no change in the benchmark interest rate, as expected.

However, it did hold the asset purchases under its PEPP program unchanged, despite some market participants looking for a reduction in the PEPP size and a possible commitment to increase the APP program due to subdued inflation in the Euro area.

Moreover, the ECB kept the wording “significantly”, when referring to the PEPP purchases and added “net”. This is important for market participants because, since the Q1 announcement that it will increase the PEPP purchases “significantly”, the reality did not confirm the pace. Now that the word “net” was added, it means that redemptions will not play a role anymore when interpreting the ECB’s bond-buying.

The ECB Press Conference – Responsible for the EUR/USD Market Move

The EUR/USD exchange rate was not impressed with the ECB’s initial announcement. It hovered around 1.2170, as it did the whole week prior to the decision.

But things changed once Christine Lagarde started the conference. It is still unclear if the EUR/USD’s reaction followed Lagarde’s comments or if the pair reacted to the US inflation data, released at the same time.

Once the press conference started, the EUR/USD quickly fell about twenty pips, but quickly recovered on her optimistic perspectives. It is for the first time in a while that the ECB press conference started with presenting the positive developments in the Euro area economic conditions, and not the negative ones.

And for the first time since the ECB presented the fact that the Governing Council now sees the growth outlook for the period ahead as broadly balanced. The growth outlook in the Euro area was revised higher by ECB staff, to 4.6% from 4% in 2021, and to 4.7% from 4.1% for 2022.

As such, it is no wonder that the Euro found bids on all attempts to move lower ahead and during the press conference. The ball now is in the Fed’s court, with the next week’s Fed meeting holding the key for summer positioning.