The Governing Council of the European Central Bank gathered for a pivotal meeting yesterday, on which it was agreed that the interest rate in the Eurozone would be kept unchanged at 0.00 per cent.
Additionally, the central bank decided to increase its quantitative easing program for the reeling economy by boosting the aggregate liquidity available to businesses and borrowers in general.
“The Governing Council of the European Central Bank (ECB) has today decided on additional longer-term refinancing operations (LTROs) to provide immediate liquidity support to banks and to safeguard money market conditions. While there are no material signs of strains in money markets or of liquidity shortages in the banking system, these operations will provide an effective backstop if necessary.”
The market vastly anticipated the decision given the limited options that are still available for the ECB. The extension of the TLTRO-3 program, both in time and in scope, however, bears its own uncertainties.
More liquidity in the economy does not necessarily result in proportionate economic growth. Instead, the bolstered monetary policy could end up being a decision that comes a little bit too late.
Currently, the markets everywhere are driven mostly by uncertainty – what Keynesian economists label as ‘animal spirits’ – which does not combine well with heightened fiscal stimulus.
That is so because investors and businesses tend to be reluctant to engage in economic activity, even at lesser borrowing costs, when there are so many unknowns.
Meanwhile, the Euro tumbled on the news that the aggregate money supply is going to be increased. Higher liquidity means lesser competitiveness for the underlying currency.
The EURUSD bounced back from the 38.2 per cent Fibonacci retracement at 1.14512, which is acting as a resistance level. The recent bullish momentum is also waning.
EURUSD 1D Price Chart. Image source: Trendsharks ©, created with TradingView.com
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