ECB meeting preview: PEPP frontloading stifles yields, but Lagarde plan a July retreat?

ECB meeting: when and where?

The forthcoming European Central Bank (ECB) meeting will take place on Thursday 22 April. The initial monetary policy decision will be announced at 12.45pm (London time), with the press conference getting underway at 1.30pm.

Coronavirus waves continue to stifle economic recovery

The eurozone economic recovery remains on rocky ground thanks to a sluggish vaccination drive, and subsequent growth in Covid-19 cases. That lack of antibody protection brings a distinct lack of confidence that any lockdown measures will be fleeting, with future easing of restrictions likely to result in a spike in cases.

The chart below highlights that slow pace protection compared with the UK and US, with the eurozone likely to suffer greater economic hardship as a result. However, there is hope that this will improve, with the European Union (EU) expected to receive 50 million doses of the Pfizer jab in the second quarter (Q2).

Meanwhile, there will be major questions around the single dose Johnson & Johnson jab which has been approved despite AstraZeneca-style blood clots. Whether the region sees the same type of skepticism around this vaccine remains to be seen.

Despite the difficulties experienced over recent months, the economic outlook does remain positive as the vaccination push gathers momentum and economic activity responds in turn.

The purchasing managers index (PMI) survey provides a good gauge of how the eurozone economy is faring, and while experiences will remain uneven, we are seeing improvements that point towards a rebound in the Q2 gross domestic product (GDP) reading.

What should we expect from the ECB?

As things stand, the eurozone appears to be caught between a slow vaccination drive and a pathway towards freedom. With that in mind, there are grounds for a continued cautious approach from ECB President Christine Lagarde on Thursday.

From an interest-rate perspective, we can see that markets expect little change from the top. Markets are pricing in a mere 3.6% chance of a rate cut, with the bank likely to follow market expectations by keeping rates steady.

The decision to front-load Pandemic Emergency Purchase Programme (PEPP) payments in March was aimed at stunting the rise in treasury yields, and that appears to have been relatively successful given the consolidation we have seen since.

The chart below highlights how that decision on 11 March effectively stopped yields in their tracks, with the Italian an German 10-year yields struggling to break higher since.

The fear for some is that by front-loading of the PEPP programme, we could see an earlier end. The graphic below highlights how most believe we will see the PEPP scheme end on track in March 2022.

However, that would also include a slowing of the programme by July. With that in mind, traders will be keeping a close eye out for signs that the bank could start to pullback on the policy in the coming months.

EUR/USD rally raises potential for a bullish reversal

EUR/USD has been regaining lost ground of late, with the pair rising into a six-week high on Tuesday. The rise through $1.199 resistance brings about a bullish signal, yet there is still a rise that we are retracing the wider decline from $1.2243.

With the stochastic rolling over and the price falling back into that same $1.199 level, we could soon find out whether this pair is going to continue its ascent or reverse lower once again.

On the intraday basis, we can see how the current pullback remains within the realms of the ongoing uptrend. With that in mind, bullish positions still look attractive around the 61.8% to 76.4% Fibonacci zone, where a break below $1.1942 would be required to bring a bearish reversal signal into play.