ECB Expands PEPP Stimulus to Help Economy, EUR up

The European Central Bank decided to leave its interest rate unchanged another month, but officials surprised markets with the expansion of the PEEP stimulus program. The central bank didn't take any measures to contain euro's growth, which led the unique currency to gain versus the dollar.

On Thursday, the ECB kept the main refinancing operations rate at 0.00 percent, the marginal lending facility at 0.25 percent, and the deposit facility unchanged at -0.50%, as the market widely expected.

However, Christine Lagarde's team decided to expand the envelope under the Pandemic Emergency Purchase Program, or PEPP, by 500 billion euros to a total of 1,850 billion euros. The central bank also extended the window time for net purchases to at least March 2022, under the PEPP umbrella.

Following a meeting of its policy-setting Governing Council, the ECB said in a statement in a press conference:

The bank also highlighted its commitment to the European economy as the "ECB will conduct net purchases until it judges that the coronavirus crisis phase is over." The reinvestment of principal payments from maturing securities purchased under PEPP will be on the play "until at least end of 2023."

The ECB announced the recalibration of conditions for the TLTRO III. "Specifically, ECB decided to extend the period over which considerably more favourable terms will apply by twelve months, to June 2022."

The bank will raise the total amount that counterparties will be entitled to borrow in TLTRO III operations "from 50% to 55% of their stock of eligible loans."

Finally, and among other stuff, ECB's "net purchases will continue at a monthly pace of €20 billion."

On the currency framework, ECB's president Christine Lagarde said that the bank would monitor the development of the euro exchange rate "very carefully going forward." However, she also said that the central bank does not target exchange rates.

The Expert Investor Takeaway

The expansion of the PEPP in Europe shows the European Central Bank's commitment to propping up the European economy. While the COVID-19 vaccine is about the get implemented massively in all corners of the world, the ECB is doubling its efforts to give the final push for the European economy in the post-pandemic era.

It will add more money into the European economy, like the United States. Still, in a difference of any pro-stimulus news on the dollar, the euro is reacting positively to the announcement. Why? Well, the ECB did not mention any measure to counterattack recent gains in the euro.

In that framework, investors would be more willing to bet in the euro than in the dollar, as the greenback seems to be destined for an extended period of weakness. In contrast, the euro looks healthy with a central bank making efforts to push up the economy.

EUR/USD Remains Above 1.2100

The euro reacted positively following the ECB meeting and Christine Lagarde's press conference. Against the dollar, the unique currency is posting its first positive day on Thursday after four negative sessions in a row.

Currently, the EUR/USD is trading at 1.2115, which is 0.31 percent up on the day. Technical indicators suggest that the uptrend is intact, though some consolidation should be developed before the pair moves up to test December 4 highs at 1.2177.

In that framework, TD Securities believes that the EUR/USD should clear up the 1.2147 level before seeing another leg higher. "EUR/USD caught an initial bid in the immediate aftermath of the decision, but we are not yet inclined to read too much into the move — at least with respect to the specific policy changes implemented. There may be some mild degree of disappointment for those who were looking for a bigger package from the Governing Council. That was probably too much to hope for, however."

TD Securities states that they would stay firm if the hawkish bias persists. However, they do believe that the main factor is a weak dollar than "anything the ECB itself has done."

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