Since the start of the coronavirus crisis, central banks and governments around the world came up with various solutions to fight similar problems – high unemployment, large deficits, and economic uncertainty. Contrary to what we have seen during the 2008-2009 Great Financial Crisis, the European Union stood at the heart of market stability.
Not only the European Central Bank (ECB) but also the European Commission (EC) acted with determination and unprecedented speed, delivering a clear message of confidence to financial markets.
ECB Is Here to Close the Spreads Anyways
One of the things Christine Lagarde, the ECB President, will remain in financial markets’ history is her remarks that the ECB is not here to close the spreads. At the time of this remark, pre-COVID-19, the markets took it as a lack of experience and a terrible message to send to financial markets.
Regardless of how the ECB tried to downplay it later, it sent the Euro lower, with the EURUSD rate falling below 1.08 at that point in time. However, what followed vindicated Lagarde and put her on top of the list as one of the most pro-active central bankers during the pandemic.
The ECB launched the PEPP (asset purchasing program to help relieve the pandemic economic recession), whilst the commission launched the Recovery Fund – all the capital committed exceeding €1.5 trillion, a staggering amount by all standards.
No one believed this was possible in such short notice, especially in Europe, with its leaders known for their long decision-making process.
The result? The spreads tightened, improving the borrowing conditions for the European Union members.
What is even more impressive is the aggressiveness of the ECB easing. This is a central bank that keeps the deposit facility (one of the three interest rates it sets every six weeks) into negative territory for a few years now. Yet, it found resources to further accommodate monetary conditions during the pandemic.
In fact, the ECB’s balance sheet increased more than the Fed’s balance sheet during the coronavirus pandemic.
The result? The markets understood the signs of confidence delivered from Europe and sent the Euro higher across the dashboard, while the spreads shrank considerably.
Still, one piece of the puzzle remains, at least for the currency traders. With the ECB exceeding the Fed in its easing efforts, why does the Euro appreciate and not the other way around?
It may be that the US elections in November will offer the answer to this question. Until then, the Euro benefits from investors’ trust.