ECB flips to a more hawkish tone


At the February ECB meeting, the central bank reiterated that it would be ending PEPP in March but continue buying bonds under the Asset Purchase Program at a pace of 40 billion Euros a month in Q2, 30 billion Euros a month in Q3 and 20 billion Euros a month in Q4. However, due to the continued increase in inflation since the last meeting, all that has changed!  CPI for February rose to 5.8% YoY from 5.1% YoY in January.  ECB members knew they had to do something, and they did.

Guide to the ECB

In the statement, the ECB dropped the language suggesting that rates could be lower than they currently forecast.  In addition, it dropped the pledge to end APP “shortly” before rates raise.  It also announced a faster winding down of their asset program.  PEPP will still end in March.  However, it will now only purchase 40 billion Euros worth of bonds in April, 30 billion Euros worth of bonds in May, and 20 billion Euros work of bonds in June.  This would effectively end the bond purchase program in Q3, rather than Q4. 

What is tapering?

The ECB also changed its forecasts for inflation and growth.  Previously, the central bank had forecast inflation at 3.2% for 2022, 1.8% for 2023, and 1.8% for 2024.  These forecasts all have been revised higher.  The ECB now forecasts inflation at 5.1% for 2022, 2.1% for 2023 and 1.9% for 2024. This is a large revision to the 2022 forecast!  Note that the ECB targets 2% inflation.  Regarding growth, forecasts were lowered.  Previously, the ECB had forecast growth at 4.2% for 2022, 2.9% for 2023.  These forecasts have been revised lower.  The ECB now forecasts growth at only 3.7% for 2022 and 2.8% for 2023.  In a nutshell, higher revisions were made for inflation and lower revisions were made to growth!

EUR/USD had initially gone bid on the hawkish statement, however had later pulled back as traders used the opportunity to sell the bounce on the risk-off move in stocks.  High inflation and lower growth lead to stagflation, which investors don’t like!  In addition, although there had been a 3rd meeting between Russian and Ukraine officials, the meeting ended without any further progress. Therefore, traders were happy to buy US Dollars at better levels on the bounce.

20220310 eurusd daily ci

Source: Tradingview, Stone X

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On a daily timeframe, EUR/USD bounced off the 161.8% Fibonacci extension from the lows of January 28th to the highs of February 10th near 1.0890.  Also, notice the horizontal long-term trendline at the lows which dates to January 2017!  When the pair bounced after the meeting, it stopped abruptly at the previous lows (now resistance) at 1.1121.  First support is at the long-term trendline and the March 7th lows near 1.0806.  Below there is horizontal support at 1.0727, which is the lows from April 2020.  Resistance is at Thursday’s high (and the lows of January 28th) at 1.1121, then the top downward sloping trendline dating back to May 2021 near 1.1200.

20220310 eurusd 15 ci Source: Tradingview, Stone X

Although the ECB pledged to speed up the pace of bond tapering due to increased inflation, it also increased its forecast for inflation and lowered its forecast for growth.  Markets took this as a negative and sold EUR/USD after an initial bounce.  Watch previous lows and the long-term trendline to see if it can hold!

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