Strong euro started to disturb the ECB [Market commentary]

The head of the ECB announced that the bank will closely monitor the exchange rate. This may limit the appreciation of the euro against the dollar in the future.

Results of the December meeting European Central Bank (ECB). As expected, the bank did not change interest rates in the Eurozone, leaving the refinancing rate at 0%, but added gasoline to the fire by increasing support programs. The ECB increased the value of the Pandemic Asset Purchase Program (PEPP) by € 500 billion to € 1,85 trillion, while extending it by 9 months to March 2022. It also extended the TLTRO loan program by one year to June 2022.

Considering the smaller negative impact of the second wave of the pandemic on the European economy, the bank adjusted its forecasts for a decline in GDP growth this year, expecting a lower recession (-7,3% versus -8% previously forecast), but this automatically forced a downward correction of the expected economic recovery in 2021 (3,9 percent vs. 5 percent). On the other hand, the forecast for 2022 went up (4,2% vs. 3,2%).

No changes after the ECB meeting

In the absence of significant surprises, both in terms of interest rates, the extension and extension of the support program, or the revision of macroeconomic forecasts, something else attracted attention. Namely the fact that the European Central Bank began to be disturbed by the ever stronger euro. Christine Lagarde, the head of the bank mentioned it many times during the press conference after the meeting. She said that the bank is closely monitoring the appreciation of the euro and that it will monitor the situation in the currency market. And no wonder. Still in May EUR / USD exchange rate it stood at 1,08, while in December it set a 2,5-year high at 1,2177. This must have a negative impact on the results of European exports and, additionally, it is one of the reasons for deflation.

Daily chart EUR / USD. Source: Tickmill

EUR / USD did not react directly to Lagarde's words. However, this expressed concern is one of the factors that will hold us back with any crazy forecasts for the EUR / USD for 2021. In time, the central bank's stance may be one of the main factors hampering the pair's rise. Hence, all the more the 2018 highs (1,2555) are rising to the target level for the current upward trend.