By Lukman Otunuga, Research Analyst, ForexTime
In a move to aid the eurozone, the European Central Bank (ECB) has boosted its pandemic emergency purchase program (PEPP) by a whopping €600 billion to €1.35 trillion.
This monetary policy bazooka comes on top of a €750 billion proposal by the European Commission, adding to a range of strategies in Europe and around the globe to combating the coronavirus menace. With the eurozone economy projected to contract -8.7% this year, every single support offered by the ECB and government will certainly shape the outlook over the coming months.
Why it matters?
Quantitative easing is a monetary policy tool that central banks use to inject money directly into the economy.
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It involves large-scale purchases of government debt in the form of bonds which essentially pushes down the interest rates offered on loans. Lower interest rates make it cheaper for households and businesses to borrow which could stimulate consumption.
The million dollar question is whether the €600 billion increase to the PEPP and extension to June 2021 will achieve this goal.
What could go wrong?
Well…it is important to keep in mind that the coronavirus pandemic is a health crisis that may leave a strong psychological impact on consumer behaviour and business sentiment.
It may take more than negative interest rates, QE bazookas and fiscal timebombs to mend confidence back to pre-coronavirus levels.
Another theme to keep a close watch on is inflation. When the markets become too flooded with cash, it can lead to rising consumer prices. However, this could be a good thing for Europe which currently suffers from anaemic inflation levels.
How does this impact the Euro?
Since the idea behind QE is to inject money into markets, the increase in supply should weaken the currency overtime.
However, this may end up boosting attraction towards the Euro instead if lower interest rates stimulate consumption and revive economic growth.
EURUSD Technical outlook
The EURUSD jumped over 150 pips following the ECB’s decision to throw more firepower at COVID-19.
Looking at the technical picture, prices are heavily bullish on the daily charts as there have been consistently higher highs and higher lows. A solid daily close above 1.1360 may open the doors towards 1.1450 in the medium to longer term. Lagging technical indicators like the Moving Average Convergence Divergence (MACD) and 20 Simple Moving Average (SMA) both point to further upside.
Should 1.1360 prove to be reliable resistance, the EURUSD could sink back towards 1.1280.
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