The last press conference of the ECB raised more questions from market participants than gave answers. It was unclear how much the bank would ramp up asset purchases to offset material pickup of bond yields. Recall that 10-year German bund yield doubled from -0.55% to -0.25% in a short timespan – from February to March. Such a rise in primary borrowing costs looked like it could easily thwart recovery in the Eurozone plagued with lockdowns. The ECB didn’t follow its vague commitment to substantially increase purchases – MoM gain in March was only 20%. The minutes of the March meeting released yesterday clarified the scale of the Central Bank's intervention in the debt market, which had implications for the euro.

First, let's look at the key points from the Minutes:

  • Risks to forecasts of economic growth became more balanced. That is, the number of outcomes where growth may not justify forecasts and vice versa exceeds forecasts has become, so to speak, less different;
  • The protocol mentioned a lot about the impact of Biden's infrastructure plan on the growth of the Eurozone, although Lagarde did not talk about this at the meeting. This may be the reason not to ramp up asset purchases or complete the program earlier;
  • The Governing Board was surprised by the growth of inflation since the beginning of the year, but, like the Fed, considers acceleration as a temporary phenomenon;
  • The decision to increase asset purchases in response to the rise in risk-free rates and sovereign debt yields was not unanimous, which means that the scale of intervention is not as strong as the market initially assumed, based on the ECB's comments about “substantial purchases”

It is clear from the protocol that the ECB is not going to introduce control of the yield curve as Japan did and will only react to excessive growth in yields or inflation. Taking the Treasuries reaction to the Fed's comments as an example, it is clear that without the support of the ECB, there is a risk of renewed flight from long-dated EU bonds. The latest PMI data pointed to improving economic conditions and business climate in the Eurozone in March, which of course suggests that inflationary pressures will increase in the coming months. Consequently, further growth in risk-free rates should be expected and since the ECB is not going to intervene much into the process, the euro should experience some support from this. Next week we may see continued growth in German 10-year bond yields towards the highs since late February and additional strengthening of the euro amid more attractive yields in EU debt. The nearest target for the European currency is 1.1950 level against the dollar:

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