Cheap debt on the European market. Will the ECB support the economy?

European moods balance on a thin line of euphoria and fear. People are beginning to get used to the new conditions, and the coronavirus, despite the ever-increasing cases of morbidity and mortality, has ceased to arouse so much emotion. The situation on the Old Continent seems to be heading towards stability. The growing loosening of restrictions on the accustoming of the population to the "pandemic" reality is currently benefiting people and investors. In connection with this (apart from extreme data on illnesses), we should not see the euphoric and strongly supplying sentiment that we had just a month ago. He can serve as an example, for example German DAX index, which once lost 4% and the other day gained 7%. We will try today to look at the current macroeconomic situation mainly in terms of debt. Numerous interest rate cuts have done their job, and as we know, the long-term prospect of currency pairs rising / falling (in economic data-based analytics) has a lot to do with the difference in interest rates between countries.

What will the European Central Bank do?

The terrible prices of bonds (especially Italian ones) are not surprising. Cheap debt encourages to incur liabilities, which is also associated with smaller credit restrictions. The United States, as we wrote many times, launched several debt purchase programs. One of them focused on local government obligations and corporate debt, worse still with a low rating. Definitely a treatment Federal Reserve was aimed at  building the economy by pumping money into it, where liquidity was significantly at risk. Will he decide on a similar move? European Central Bank? We can get the slight impression that the ECB is in no rush. Thanks to the support of the Fed, S&P Global Ratings maintained its national rating. In the euro zone, however, we are faced with a (very real) risk of debt cuts.

Expedited ECB purchases

Key words in this regard may be the words of the head of the ECB Lagarde, who in a recent commentary on the occasion of a press conference. She mentioned that now is the right time to increase the pace of purchasing liabilities and that they should be moved more towards BTP (Italian bonds). Near the end of summer, nearly EUR 1,5 trillion is to be allocated for this purpose. At all costs, Lagarde wants to create a greater sense of credibility with the institution he manages and trust that investing alongside the ECB is safe. I think that next week will largely answer the question about the further fate of bond-related buying programs, due to the planned meeting.

Chart EUR / USD, M30 interval. Source: xNUMX XTB xStation

What does the euro say?

The main currency of the euro area cannot be viewed solely through the prism of the recent ECB actions. It is a collection presenting the moods of the broad market (mainly the condition of the German economy). Some "local" currencies from the Old Continent may feel pressure from it. Undoubtedly, however, the more dynamic and decisive movements flowing from the European Central Bank are good support for the EUR if we talk about it in the context of the global market. Eurodolar made up for a considerable amount of losses in recent sessions. Of course, one cannot be very optimistic, but the combination of this market reaction with the ECB's announcements gives a light in the tunnel for a greater appreciation of the EUR on the market.