All Eyes on ECB With PEPP Tapering Expected in Q4

The European Central Bank’s Governing Council will meet this week to decide on the level of PEPP purchases; analysts expect a reduction after two-quarters of higher purchases. the amount will remain undetermined, but monthly purchases may be reduced to 60 billion euros from the current 80 billion euros.

Statements made by European Central Bank officials over the past days confirmed the continued good economic situation in the third quarter along with the low yields in recent months with the optimistic economic outlook.

The ECB has to make decisions on TLTRO as well, in addition to the timeline for the PEPP, which currently has a minimum term of March 2022, but analysts expect those decisions to be made in October and December, respectively. ECB President Lagarde is expected to play down the slight reduction in monthly asset purchase levels and focus on the very dovish guidance on rates and the fact that the ECB remains willing and ready to step up support again if needed.

Hence the markets are focusing on any changes in the ECB’s stance before starting to factor which of the two economies performs better. As and when Fed tapering does start being factored, which we anticipate later in the year, this should impart a strong downside bias to EURUSD.

In a recent Reuters poll, around 42 surveyed said, “The European Central Bank will announce a cut to the pace of its emergency bond purchases from next quarter at its meeting this month but will keep buying bonds through 2024 at least under its main program, and possibly much longer.”

“The economy is performing better in 2021 than we expected, and this will be reflected in the projections that will be published in the coming days.” the European Central Bank’s Vice President Luis de Guindos said in an interview on Wednesday.

“we are now in a situation where we can think about how to reduce the pandemic special programs,” said ECB policymaker Robert Holzmann

“Right now there is a disconnect between wage data, which remains flat, and the anecdotal evidence of some higher wage demands and pockets of staff shortages,” said Jacob Nell, head of European economics at Morgan Stanley.