EUR/USD used to be quite bullish during most of last year, as the USD turned bearish. The climb lasted until the first week of January and then the highs started getting lower. 1.2250 turned out to be the next high in February and then this pair took a swan dive, as the economic situation improved considerably in the US.

The situation is also improving in Europe, which left recession in services behind this month and rumours at the ECB (European Central Bank) about cutting the PEPP stimulus programme short, which would be positive for the Euro. Bloomberg reported on Friday that even though the ECB the policy meeting this week left the PEPP programme intact, ECB policymakers are said to expect a tough decision in June over whether to start easing PEPP purchases, according to  sources, which is when the next set of economic projections are released.

Eurozone April Flash Services

Some modest beats there, with the headline manufacturing reading coming in at a eight-month high and the composite reading at a nine-month high. Of note, the manufacturing index and output sub-index are at record highs, since the series began in June 1997.

“In a month during which virus containment measures were tightened in the face of further waves of infections, the eurozone economy showed encouraging strength.

“Although the service sector continued to be hard hit by lockdown measures, it has returned to growth as companies adjust to life with the virus and prepare for better times ahead.

“The manufacturing sector is meanwhile booming. Pent-up spending, restocking, investment in new machinery and growing optimism about the outlook have all helped fuel a further record surge in both output and new orders.

“The steep rise in demand for raw materials is continuing to lead to unprecedented supply chain delays, which are in turn driving up firms’ costs at the fastest rate for a decade. Consumer price inflation may well rise sharply in coming months as a result, though the extent of the rise will be dependent on the strength of demand and the supply situation, both of which remain highly uncertain at the moment.”

The ECB Meeting on Thursday

The expectations for Friday’s ECB meeting were minimal and they were met, which means that they said nothing about cutting short the PEPP programme, which is negative for the Euro since it keeps the cash pumping up.

Although there were few hints at what’s coming next. The consensus is that the ECB would offer nothing and that’s what happened.

Journalists tried to nail down Lagarde on what’s coming next on PEPP purchases but she offered nothing, which again a negative for the euro, since there was some speculation she would pre-commit to dialing back QE to pre-March levels.

Instead, she emphasized that there’s no set level for PEPP and that it will be adjusted based on financial conditions and the inflation outlook.

There was also some speculation that we would see something more upbeat overall given consistent beats in eurozone economic data, but all she offered was that they expected a ‘firm’ rebound in activity later in the year and the business investment indicators are better. That doesn’t offer much either. Below is the press conference and the Q&A from the ECB.

ECB-Lagarde Press Conference

• Pandemic continues to constrain activity
• Near-term outlook remains clouded by uncertainty
• Vaccine underpins expectation of a ‘firm’ rebound in economic activity
• Inflation has picked up on idiosyncratic events but underlying pressure remains low
• Risks to wider financing conditions remain
• Governing council expects PEPP in this quarter to be conducted at significantly higher pace than in Q1 (repeat from statement)
• PEPP envelop need not be used in full if favorable financing conditions maintained; can also be boosted if needed
• GDP was 4.9% below pre-pandemic level at year end
• Economic may have contracted again in Q1 but points to resumption of growth in Q2
• Business investment has shown resilience
• Medium term risks more balanced
• Headline inflation likely to increase further in coming months
• Inflation expectations are at subdued levels
• Fiscal measures should be targeted and temporary

Q&A Christine Lagarde on ECB decision, April 22, 2021

• Our views are largely the same as in March
• Vaccination pace is improving but we’re also seeing more pressure on economic and health sector from virus