The euro resumed its rise against the U.S. dollar after the European Central Bank boosted asset purchases on Thursday. Having telegraphed its plans to ease as far back as October, today’s decision was widely anticipated. In yesterday’s note, we argued that unless its actions were more aggressive, EUR/USD could see a post-ECB rally.
EUR/USD traded higher, but its gains were modest, reflecting the currency’s overstretched move. The central bank increased its Pandemic Emergency Purchase Program by $500 billion, right in the middle of the market’s $400- to $600-billion estimate. It also extended the program to March 2022 from the middle of 2021. Most market-watchers were looking for an extension to the end of 2021 and maybe 2022. The central bank also lowered its growth forecast for 2021 but raised its forecasts for 2020 and 2022. On inflation, it cut its projections for this year and 2022. These small, but important adjustments tell us that the ECB, on balance, is less pessimistic but still plans to keep monetary policy easy for a very long time. This is especially true with ECB President Christine Lagarde’s comment that it may not need to use the entire PEPP envelope.
EUR/USD snapped a four-day decline to trade as high as 1.2159, just under the 50% Fibonacci retracement of the May 2014 to January 2017 decline. If it breaks above 1.2170, the next stop could be the April high of 1.2414. Between some ECB optimism, mostly better data, declining virus cases and broad-based U.S. dollar weakness, EUR/USD has fundamental support for further gains.
Meanwhile, investors continued to sell U.S. dollars as weekly jobless claims surge to 853,000. This is the highest level since Sept. 19 and reflects the effects of recent lockdowns. Consumer prices rose 0.2%, which was more than expected but, as we noted, inflation is very low and a small uptick won’t affect Federal Reserve policy. Producer prices and the University of Michigan consumer sentiment index are due for release tomorrow. The rise in virus cases could dampen sentiment, but any declines may be small considering positive vaccine news.
Sterling sold off sharply after the dinner between Prime Minister Boris Johnson and European Commission President Ursula Von der Leyen ended with no meaningful developments. Both sides will continue to talk over the weekend, but everyone is preparing for a no-deal Brexit. Johnson said Thursday there’s a strong possibility negotiations will fail as the European Union prepares for similar contingencies. There’s still hope that a deal can be made before the end of the year, but it's fading by the day.
All three commodity currencies extended higher. New Zealand reported strong manufacturing PMI numbers on Thursday evening. The index rose from 51.7 to 55.3, the strongest level since July. No data was released from Canada, but the lack of weakness in stocks and the overall decline in the U.S. dollar drove CAD and AUD higher.