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Demand hike for Euro if ECB decides to end PEPP

09 Sep 2021

 

Should the ECB announce plans to start the process of winding down its Pandemic Emergency Purchase Programme (PEPP), the Euro may see an increase in demand.

 

"Investors are wary of the ECB policy decision on Thursday, anticipating a potential trim to the PEPP bond-buying pace alongside hawkish sentiment from the ECB, which could see the Euro strengthen," according to Adam Ma, Western Union Business Solutions analyst.

The Pandemic Emergency Purchase Programme was unveiled by the ECB in March last year to support the eurozone economy by purchasing government and private sector bonds.

Bringing an end to the initiative would represent an important step towards monetary policy tightening, something analysts believe would offer support to the Euro, reports Pound Sterling Live.

ECB policymaker Robert Holzmann said earlier this week that the bank may tighten policy sooner than forecast due to ongoing inflationary pressures.

He said: "There is the possibility that we may be able to normalise monetary policy sooner than most financial market experts expect."

 

Ahead of the ECB’s decision, the Pound-to-Euro exchange rate stands at 1.1646 and a hawkish stance could see the downtrend continue that has been in place since the beginning of August.

 

Barclays’ economists predict the statement to amend the language on "a significantly higher pace" of PEPP purchases, showing a fall of €10 - €20 billion going into Q4.

 

"While we believe the ECB will try to present the changes as a technical adjustment, the upward revisions to growth and inflation will make it hard to dispute that the distribution of policy probability has shifted clearly away from rate cuts, laying bare the mispricing in rates markets and supporting the EUR," said Barclays.

 

Even if PEPP comes to an end, the Asset Purchase Programme will continue. Therefore, "beyond the initial reaction, the EUR faces a slow policy normalisation path, political uncertainty and negative net issuance post QE. Any EUR rally will be capped," Barclays added.

 

If this is the case, any Pound-Euro exchange rate weakness will be limited.