Wisdom comes with experience. If the former head of the ECB, Mario Draghi, ate a dog in matters of communication with the market, then Christine Lagarde is still just learning. Yes, she did not step on the same rake as in March, saying that the central bank would not tolerate the growing risks of fragmentation in the eurozone, but so far it has little understanding of how the markets can react if they don't get what they want. Although not all investors hoped for an increase in QE in April, they seriously expected reports of the purchase of bonds of the “fallen angel” - securities whose investment rating could fall to the “junk” due to the pandemic. Did not wait. The Frenchwoman added fuel to the fire, saying that the OMT program, developed during the 2012 debt crisis, is not suitable for current conditions.
After it became known that the decline in Eurozone GDP in the second quarter was a record for the entire history of accounting, the Governing Council was entitled to demand a weakening of monetary policy. Indeed, before the pandemic, the European economy dipped 3.8% qoq and 14.4 g / g, while the US economy dipped only 1.2% qoq and 4.8% y / y . At the same time, the ECB balance sheet has grown by € 645 billion since the beginning of March, the Fed balance sheet - by $ 2.3 trillion. It was time for the European Central Bank to step up its game. He went on to reduce the interest rate on the LTRO long-term lending program from -0.5% to -1% and to launch the PELTRO non-targeted financing program at -0.25%, the resources of which can be effectively used when the old loan tranche expires.
The dynamics of European GDP
Obviously, this was not enough for the market. Investors were waiting for clarification of the situation in Italy, Spain and other countries of the currency block most affected by coronavirus. The question of whether the ECB will buy Fallen Angel bonds is stuck in the air, and the OMT program, which provides direct financing for countries experiencing stress if they have a credit line with ESM, is not suitable for current conditions, according to Christine Lagarde. But despite the big words about the prevention of fragmentation of the eurozone, the release of data on GDP for the first quarter increased the risks of the collapse of the currency block. The Italian economy dipped by 17.6%, Spain by 19.2%, and Austria by only 9.6%. At the same time, EU leaders cannot agree on the form in which assistance should be provided, in the form of grants or loans,
Along with the disappointment over the inability of the European Central Bank to give the market what it wants, the EUR / USD take-off to a 2-week high was affected by the rebalancing of the euro positions associated with the exercise of options with a strike at $ 1.08. That is, a technical factor whose impact is short-term. There is a lot of problems with the single European currency, which does not allow it to rush north at the speed of a courier train, so it makes sense to focus on sales of the analyzed pair on growth, followed by a rebound from resistance at 1.0965, 1.107 and 1.117.