Somewhat surprisingly, the Governing Council of the European Central Bank decided to refrain from scaling up its underlying monetary policy at the present rate. Meanwhile, the Main Refinancing Rate was kept unchanged at 0.00 per cent in accordance with the consensus forecasts.
The Council did not deem it necessary to scale up its PEPP programme –Pandemic Emergency Purchase Programme – at the present rate, despite the soaring euro and dampened economic prospects in the short-term. The ECB would also continue to purchase government treasures at the same pace as before.
Thereby, PEPP's total envelope of 1350 billion euros remains untouched in September. Moreover, the Council also decided to refrain from altering the breadth and pace of its other purchase programs at the present rate – the Asset Purchase Programme (APP) and Targeted Longer-Term Refinancing Operations (TLTRO III).
The post-decision monetary policy statement of Christine Lagarde, the President of the ECB, sent mixed signals regarding the recovery prospects for the Eurozone.
On the one hand, Lagarde listed a strong rebound in economic activity; a significant pick-up in domestic demand and a notable rebound in consumption as welcoming developments.
On the other hand, she noted that the overall economic activity is well-below the recorded levels prior to the coronavirus crisis. Momentum in the services sector is slowing down and falling behind manufacturing, while short-term headwinds have been exacerbated by the resurgence of COVID-19 cases over the summer months. Furthermore, dampened inflationary pressures are being triggered by the labour market slack and falling energy prices.
The market reacted positively to ECB's decision, even though the Bank refrained from implementing any significant changes to its underlying monetary policy. The euro jumped when it became clear that the Governing Council is not especially concerned with its bullish rally at present.
As can be seen on the 4H chart below, the EURUSD jumped by over 0.50 per cent immediately following the publication of ECB's decision. The price action is currently attempting to break out above the major resistance level at 1.18800.
If it succeeds, the next target level for the newly emerging upswing would be the historic resistance at 1.20000. The latter has psychological significance.