During the meeting on Thursday, the ECB decided to slow down the purchase of bonds under the PEPP program to moderately lower rates of net asset purchases, than in the previous two quarters. This decision was expected, but the ECB informed the markets that further reevaluation will take place at the December meeting, which immediately reduced the impact of the meeting results on market volatility.
The exact amount of the new purchase rates is not reported. It seems that the ECB has decided to leave the opportunity to adjust its actions depending on new factors, such as a likely outbreak of COVID-19 in the autumn or a global slowdown in the economic recovery, as what was repeatedly said earlier (based on a decline in PMI indices around the world). Reuters believes that the pace of purchases will amount to 60-70 billion per month, Danske Bank orients its readers to 60 billion, and Nordea assumes 65 billion. The estimates generally do not differ much.
The PEP program is due to end in March next year, and it is clear that we need to wait for the December meeting to announce how the stimulus under the PREPP will be replaced by some other asset purchase program. No one doubts that everything will be like this, because otherwise, the shock for the markets will be too big, and inflation is projected at 1.5% by 2023, which is lower than the ECB's target of 2%.
The ECB meeting had little impact on the EUR/USD rate. The US stock markets closed slightly in the red again, declining for four consecutive days. No purchases on the decline have been observed yet, as traders seem to be alarmed by the conflicting signals and uncertainty with the Delta strain.
In fact, ECB's decision is in line with the general position of other large Central Banks. Comparing their solutions, it can be seen that they are almost the same. On Wednesday, the Bank of Canada held its regular meeting – the main parameters of monetary policy were left unchanged. On Thursday, BoC Governor Macklem explained that they will move gradually and adjust bond purchases depending on the prospects, strength, and duration of the recovery.
The Bank of Australia also left the main parameters unchanged on Tuesday. The pace of purchases is slightly reduced, but that's all. The accompanying statement is replete with dovish wording such as "This economic slowdown is expected to be only temporary. The Delta outbreak is expected to delay but not undermine recovery. "
In general, the situation remains quite uncertain for the markets. Trading on a strong US dollar has not played out yet. Today, the next CFTC report will be released, which will show whether investors should start abandoning long positions on the dollar or still adhere to more bullish forecasts for the results of the upcoming Fed meeting.
Meanwhile, the demand for risk remains low. As follows from the Beige Book published on Wednesday, America's economic activity declined in July and August due to growing concerns about the COVID-19 delta variant. It is not known whether the virus is to blame for this or what other factors they prefer to keep silent about, but the dynamics of the labor market recovery have significantly worsened.
Most likely, the demand for risk will remain weak in the coming days, that is, before the Fed meeting on September 22. There are practically no positive signals, and the positions of the Central Banks do not add confidence to the traders.
The EUR/USD pair could not break through the nearest resistance level of 1.1909, but the chances of reaching the 1.20 mark are considered high. To reduce the euro, factors in favor of a strong US dollar are needed, which are not currently available.
In turn, the GBP/USD pair rose after Bank of England Governor Bailey comments in parliament that the minimum conditions for tighter monetary conditions have been reached, bearing in mind the steady achievement of the inflation rate of 2% and that it is reasonable to expect a rate hike in the near future.
The markets overestimated the probability of a rate hike to 35% in the 12-month perspective, compared to 25% at the beginning of the week. The pound may have received a bullish signal and there will be an attempt to implement it. Today, the nearest support level of 1.3891 can be tested, while the EUR/GBP cross has a good chance to continue the decline. The aim is to test the low of 0.8450 from August 10.
