Last Friday the ECB accounts (the equivalent of the Fed’s Minutes) took markets by surprise, highlighting a dovish tone, and some concerns were enough to send the Euro lower for the end of the week. The release came as a cold shower for Euro bulls, especially that the entire week the Euro traded with a bullish tone due to the perspectives of an upcoming fiscal union on the back of the Franco-German announcement proposal on Monday.
The accounts, or the minutes, refer to the meeting held on the 29-30 April this year. Aside from the dovish headlines, the ECB raised concerns regarding fiscal dominance. More precisely, the ECB fears that European governments are encouraged into irresponsible behavior on the back of the large-scale interventions in the sovereign bonds market.
Concerns Regarding the TLTRO-III Program
Another worry for the ECB is that the recent TLTRO (Targeted Long-Term Refinancing Operations) conditions (the third round), may stimulate banks to avoid lending funds to the economy and the general public. More precisely, the TLTRO-III minimum rate was lowered 50 basis points below the Deposit Facility Rate (DFR), and the ECB is worried that the banks, once they obtain funds, will avoid increasing private sector lending and instead, deposit them at the DFR.
Of course, it is just a concern, but nevertheless, the decision was made and issued by the bank. Moreover, the ultimate goal is just that, as the liquidity, in the end, moves in a limited circle.
The accounts also reiterated that the HICP inflation is getting lower at a steady pace – it reached 0.4% in April from 0.7% in March, and deflationary concerns put further pressure on the ECB’s future decisions.
All in all, the Euro did not like the message, and it traded with a dovish tone for the rest of the day. The EURUSD, which traded as high as 1.1009 on Thursday, fell to below 1.09 late Friday, a move seen on other pairs too (e.g. EURJPY).
The uncertainty about the duration of the current health crisis makes it difficult for central banks to properly forecast future economic conditions so that they can use the appropriate monetary policy tools. As such, traders and investors are better off interpreting the central banks’ communications in relation to the health crisis development.
Once the pandemic passes, everyone will have an easier time understanding financial market conditions – central banks and investors alike.