ECB talked about removing APP easing bias in June – AmpGFX

The rise in German yields on Thursday appeared to be supported by the ECB’s Account of the Monetary Policy Meeting on 7-8 June as yields have jumped sharply since 27 June when Draghi spoke at the ECB central bank forum, sounding more confident in the capacity of the ECB to reach its inflation target over the medium term, points out Greg Gibbs, Analyst at Amplifying Global FX Capital. 

Key Quotes

“Following that speech, which generated a sharp rise in the EUR and German bund yields, some ECB officials came out to say that the market had over-interpreted Draghi’s speech that emphasized the need for patience and sustained monetary accommodation.”

“The ECB account of the June policy meeting released on Thursday continues to call for patience and sustained policy accommodation, but it indicated that the committee members discussed changing the guidance on its Asset Purchase Programme (APP).”

“It appears that Eurozone bonds and currency are especially sensitive to evidence that APP tapering is moving into view, however gradual and cautious the ECB sounds.”

“At the ECB 8 June policy meeting, the ECB removed the downside bias to cut rates and moved from a downside bias to a balanced outlook for growth.”

“The market was so hyped up ahead of the June ECB meeting, looking for evidence that the ECB was moving toward tapering, that the EUR weakened somewhat after the ECB meeting, because the ECB also unexpectedly lowered its inflation forecasts.”

“The ECB account of the MP meeting had the opposite effect on Thursday, boosting the EUR, and sending German bond yields to new highs, because the account indicated that the ECB were discussing removing the easing bias on its APP.”

“They decided not to, mostly, for fear of triggering a rapid rise in the EUR and yields, that would tighten monetary conditions prematurely.  But the chances that they actually expand APP are low, the guidance was appropriate only “for now”, and the bias “could be reviewed”, suggesting that at upcoming meetings it could be dropped.”

“If they are willing to drop the bias to expand APP, then they appear to be moving closer towards tapering the size of the APP.”