As Bond Yields Increase, ECB Set To Drive Asset Purchases

11 March 2021 | Updated: 11 March 2021

Leaving monetary policy unchanged, the ECB indicated that it will increase asset purchases in the coming months. The move is in response to rising bond yields, which could tighten financial conditions.

In terms of economic development, the central bank attributed the likely decline in 1Q21 to high levels of coronavirus infections, mutations, and restrictions. However, GDP forecasts were slightly revised amid expectations for a faster recovery in the second half.
The central bank analyzed the recent rise in inflation, expecting long-term inflation to remain below target.

As indicated in the accompanying statement, the ECB noted that it “expects PEPP procurement in the next quarter to be at a significantly faster pace than in the first months of this year.” The statement also indicated that it will “buy flexibly per market conditions and to prevent tightening of financing conditions inconsistent with countering the downward impact of the pandemic on the projected trajectory of inflation.”

At a press conference, Lagarde expressed concern about higher bond yields, suggesting that this could “translate into a premature tightening of funding across all sectors of the economy.”
Despite ECB’s Dovishness, EUR/USD Remains High, Trades Around 1.1980s
EUR/USD is currently exploring new session highs around 1.1980, which are also weekly highs by the way, with the pair struggling to break through early February resistance at 1.1950. Bulls will now watch the test of the March 2 lows just below 1.2000 as the next key resistance area ahead of the test of the big figure.

On this day, the euro rose slightly less than 0.4% against the US dollar, but by no means stands out; The GBP and NZD were also up about 0.4% on the day against the US dollar, while the euro’s gains eclipsed the Canadian dollar, Australian dollar and Swiss franc, each of which rose about 0.5% on the day.

Thus, the main reason for the EUR/USD rally on Thursday appears to be the weakness of the US dollar, which appears to be driven to some extent by the very high risk to the market environment, which is why the Japanese safe-haven yen is performing even worse than the dollar.

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Azeez Mustapha

Azeez Mustapha is a trading professional, currency analyst, signals strategist, and funds manager with over ten years of experience within the financial field. As a blogger and finance author, he helps investors understand complex financial concepts, improve their investing skills, and learn how to manage their money.