ECB preview: time for a rest?

This week’s ECB meeting is not likely to be one with any major new policies, with the central bank holding off for now on renewed monetary stimulus.

Recent European Central Bank (ECB) meetings have been blockbusters, introducing lower rates and a host of new policies to combat the Covid-19-induced economic slump. But this meeting is likely to see ECB President Christine Lagarde and her committee sit tight to await developments, leaving policy unchanged.

Policy left as it is

It is too soon to tinker with existing policies, since the eurozone economy is only just emerging from the lockdowns put in place to combat the spread of the virus. Early data has pointed to limited and cautious rebounds, but nothing suggests that the bloc’s economy is back to full health and that some policies should be unwound.

By the same token, it is too soon to introduce new policies, since the economy is moving in the right direction, albeit slowly. There is little point using up more ammunition now when it might be sorely needed later.

Asset purchase scheme remains in place

While the ECB might not actively widen the scope of its asset purchase programmes this time around, it may look to make comments on whether it may expand the programmes later in the year. These comments may include references to widening the scope of corporate debt available for purchase, or new types of asset purchases.

Economic outlook still bleak

While things are not looking as bad as earlier in the year, the eurozone faces a long and slow recovery from the crisis. Sentiment surveys and leading indicators point to a nascent recovery, but there is still a long way to go. A variety of scenarios exist for the recovery, and while perhaps a severe drop of around 12% for 2020 as a whole is now unlikely, the mixed fortunes of some US states suggest that returning to a pre-Covid world will not be easy, with plenty of bumps along the way.

EUR/USD technical analysis

After a mixed performance in June, EUR/USD is rising once again, heading back towards $1.14 and levels last seen in March and early June. A slightly more optimistic outlook could intensify this trend, while on a price-only basis a drop back below $1.12 would likely revive a medium-term bearish view.

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