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EUR Rallies as Big ECB QE Increase Instills Confidence




EUR was given a big boost by the ECB’s decision to increase the size of the PEPP by EUR 600bln to EUR 1.35trln (expectations were for a EUR 500bln increase). 


EURUSD rallied to above yesterday’s 1.1257 highs from around 1.1200 prior to the meeting, while EURCHF is back around the 1.0800 mark having been as low as 1.0750 earlier on in the day. In recent trade, however, much of this move higher in EUR has been reversed amid profit taking. 


To sum the rate decision up; 


  • - The ECB boosted the PEPP programme by EUR 600bln to EUR 1.35trln – a larger boost than the EUR 500bln expected. 


  • - The PEPP will be extended through to June 2021 and reinvested until 2022 (not expected and another “over delivery”).


  • - The ECB will still not include junk bonds in the programme.


  • - Rates were held at -0.5% and the ECB maintained that it stands ready to adjust all instruments as needed. 


  • - In the Press Conference, when asked about the German Constitutional Court ruling, Lagarde said she takes note of the decision, but reminds us that the ECB falls under ECJ jurisdiction (not German court jurisdiction). Moreover, Lagarde said she is confident a solution can be found that is consistent with ECJ and ECB independence. 




Risk assets were given a boost in an initial reaction to this latest decision from the ECB, although gains have now been erased in European equity bourses.


The initial positive reaction in risk assets shows to me that 1) the ECB’s rate decision has increased confidence in the Eurozone, which is why EUR moved higher (as the risk of Eurozone break up, a EUR negative, is now lower) and 2) the market was happy with the decision, in that it thinks the Eurozone economic recovery will now be stronger. 


Why did risk assets head lower again? 


Note that prior to the ECB rate decision, markets had been in risk off mode, with risk assets such as equities experiencing a minor pullback having made stunning gains over the past few days. 


Moreover, attention today has returned to tensions with China; 


  • - Yesterday the US banned four Chinese airlines from flights to the US in response to China refusing to allow US airlines to resume passenger services of their own. China appeared to play down this issues, however, saying that foreign airlines are currently unable to operate routes to China but will be able to restart flights beginning June 8th. 


  • - Elsewhere, Chinese state-controlled companies reportedly cancelled some shipments from US farm exporters, including a handful of shipments of livestock feed, corn, pork and cotton, while some meat imports were pushed back, according to reports. Reports added that China state importers have cancelled between 15k and 20k metric tonnes of US pork shipments (about 10 days worth of orders). 


  • - UK PM Johnson said that the Sino-UK agreement regarding Hong Kong autonomy risks being badly eroded by Chinese actions in Hong Kong and that the UK needs to have a “clear-eyed” relationship with China.

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