Home > Is the ECB Preparing Markets for Policy Normalisation?

Is the ECB Preparing Markets for Policy Normalisation?

The ECB is testing market participants with its PEPP purchases. The Governing Council does not intend to use the PEPP purchases in full, so is this a test run?

The euro has been rallying since the start of April. It is up against the US dollar and the Japanese yen and remains bid on every pullback.

Right from the start of April, the EUR/USD turned the page from bearish to bullish. Just like that, the market reversed course and rose from 1.17 to over 1.2150 in less than six weeks.

Coincidence or not, it has a lot to do with what the European Central Bank (ECB) said and what it actually did. In hindsight, the ECB communicated a dovish message to market participants but acted hawkishly. If these were the ECB’s intentions in the first place, then there is a communication problem that either hides something, such as rate hikes sooner rather than later, or simply disregards the forward-guiding principle.

Neither of the two is likely to be the case. Nevertheless, the ECB did not deliver on its promises, and the market sent the euro higher. So what next for the ECB, now that inflation, according to its projections, is supposed to reach the 2% target by 2025-2026?

No Significant Increase in PEPP Purchases

Last March, the ECB delivered a dovish statement. During the press conference, it assured markets that it will increase assets purchases “significantly” under its PEPP programme.

The markets took its words seriously, as they should. As such, the EUR/USD exchange rate had dropped to 1.17 by the end of the month. But then the weekly data showed no “significant” increase in purchases. Despite the ECB stating that redemptions have caused the new purchases to remain constant, the market took it as the ECB failing at one of its most important tasks – communication.

Ultimately, the ECB is right. Had it not been for the PEPP redemptions, the assets purchases under the PEPP would have been up significantly.

But then again, the ECB did not mention that it referred to gross, as opposed to net numbers. Hence investors were left in the dark. The PEPP purchases chart is unchanged, and the euro threatens to break the 2021 highs.

A central bank of ECB’s importance does not make such statements without purpose. Most likely is that this is a test run to see how the markets react to the eventual normalisation of the ECB’s policies. It is not the first time that the ECB tests the markets, and it will definitely not be the last.

Trade/invest in stocks with just $50
Invest for dividends and get payout on stocks on Ex-Dividend day
Over 11 payment methods, including PayPal
Open my Account

We use cookies to personalise content & ads, provide social media features and offer you a better experience. By continuing to browse the site or clicking "OK, Thanks" you are consenting to the use of cookies on this website.