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Euro Strengthens As ECB Expands Stimulus Program to $1.5 Trillion

June 4, 2020 at 14:07 by Andrew Moran

10 and 20 eurocent coins and 10 and 20 euro notesThe euro is strengthening against its currency rivals on Thursday after the central bank expanded its pandemic bond-buying initiative by several hundred billion dollars. Policymakers are trying to throw everything at the bearish regional economy to help stop the bleeding and prevent the eurozone from slipping deeper into a recession. Will this be enough to reverse the eurozone market’s downward trend?

The European Central Bank (ECB) announced on Thursday that it will accelerate its Pandemic Emergency Purchase Program (PEPP) by $600 billion to $1.52 trillion. ECB chief Christine Lagarde confirmed some changes to the program aimed at rescuing and stimulating the eurozone economy. Growth had already been anemic before the coronavirus pandemic, so the outbreak exacerbated the region’s economic and fiscal troubles.

According to the ECB, the program will be extended to June 2021, up from the previous plans of winding down PEPP at the end of the year. But the institution already hinted that it could keep the program around until it believes the economic collapse has been contained. Maturing principal payments from assets acquired under PEPP will be reinvested until the end of 2022 – at minimum.

The central bank had expanded its efforts in recent weeks to facilitate more bank lending and to help governments respond to the financial crisis. The ECB had already been purchasing about $23 billion in government bonds at the end of last year.

Lagarde left interest rates unchanged: the deposit rate stood at -0.5%, the marginal lending facility was left at 0.25%, and the primary refinancing rate held steady at 0%.

She said in a statement:

Together with the substantial monetary policy stimulus already in place, today’s decisions will support liquidity and funding conditions in the economy, help to sustain the flow of credit to households and firms, and contribute to maintaining favourable financing conditions for all sectors and jurisdictions, in order to underpin the recovery of the economy from the coronavirus fallout.

The announcement comes soon after it was revealed that the unemployment rate in the eurozone jumped to 7.3% in April, up from 7.1% in March. Business, manufacturing, and services activity have rebounded from all-time lows earlier this year. But officials are concerned about the overall economic performance in the second and third quarters of 2020. However, the ECB believes it has some room to be even more aggressive on the monetary policy front because of low inflation levels.

Forecasts suggest the eurozone economy could contract by as much as 15% in the April-to-June period.

This comes one week after the European Commission announced a massive $826.5 billion stimulus program. Officials plan to divide the initiate between grants and loans to member states, and it will be funded by borrowing on financial markets with a goal of repayment between 2028 and 2058.

Commission President Ursula von der Leyen said in a statement:

This is Europe’s moment. Our willingness to act must live up to the challenges we are all facing. Things we take for granted are being questioned. None of that can be fixed by any single country alone. But all of us and it is way bigger than any of us.

That said, despite vast sums of money being spent and inevitably printed, the euro has been rallying at its best level in 11 weeks. Investors are optimistic about major markets reopening their economies in the fallout of the COVID-19 pandemic.

The EUR/USD currency pair rose 0.28% to 1.1266, from an opening of 1.1233, at 13:55 GMT on Thursday. The EUR/GBP picked up 0.44% to 0.8974, from an opening of 0.8933.

If you have any questions, comments, or opinions regarding the Euro, feel free to post them using the commentary form below.

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