A few years ago, the ECB introduced its version of the minutes released by the Federal Reserve of the United States. Called the ECB accounts, the minutes reveal the discussions that took place at the previous ECB meeting, what the members of the Governing Council said and how each of them views the monetary policy statement.
The accounts or the minutes are important to the market participants for several reasons. One of the most relevant points to consider is that they increase transparency and forward guidance, something that a central bank strives to achieve.
Hawkish Tone at the ECB
The ECB accounts contained a bit of a hawkish statement. The press release stated that the ECB is viewing the current size of the PEPP (Pandemic Emergency Purchasing Programme) appropriate, and it represents a ceiling, moving forward. The lack of flexibility in the PEPP target is a hawkish argument in the sense that the ECB would not do more easing further down the road.
The PEPP program is nothing but quantitative easing, meant to create digital money and impacts the ECB’s balance sheet. Its side effect, in standard times, is a weaker currency.
However, during a crisis as unique as the coronavirus, the ECB statement is difficult to interpret. On the one hand, any hint that the quantitative easing will stop anytime soon should be viewed as a hawkish statement. On the other hand, central banks’ proactiveness in responding to the crisis has been considered hawkish, even if it meant quantitative easing.
The Euro did not move on the accounts’ release. Its fate largely depends on the USD and the U.S. stock market performance.
Since the Fed lowered the rates to zero and virtually all major central banks did the same thing, there is little or no incentive for traders to look for yield in the currency market. Hence, the stock market and the USD drive the price action, moving in a tight and direct correlation.
The EURUSD fell from 1.1960 to 1.18 yesterday, mainly as a reaction to the Fed minutes that were released a day earlier. The big question moving forward is, if the Dollar index bottomed and what would it mean for the USD and the stock market? With the U.S. elections just around the corner, the volatility in the currency market is likely to increase every day we get closer to the election date.