Today, many were waiting for the decision of the European Central Bank, which did not particularly surprise traders, as everything went exactly according to the scenario that many expected. The ECB left rates unchanged and increased its bond-buying program to 1.85 trillion euros.
As part of the statement, the regulator said it would keep rates at current or lower levels and continue to purchase bonds under the PEPP program until at least the end of March 2022. There were small discrepancies with forecasts, as several economists expected the ECB to extend this program until the end of 2021. As for the other TLTRO program, it is extended until June 2022. Let me remind you that the ECB's targeted long-term refinancing operations (TLTRO) are aimed at creating additional money supply and transferring it to long-term loans to commercial banks in the Eurozone for up to four years on more lenient terms. The purpose of this program is that the funds provided to commercial banks should be used only for lending to non-financial organizations and households, i.e. individuals.
The ECB also said in a statement that the regulator is ready to adjust all its instruments if necessary and continue to monitor developments in the foreign exchange market.
Immediately after that, the European currency rose slightly, however, its upward movement against the US dollar remained within the low daily volatility that we have seen recently. The yield on Eurozone government bonds has lost some of its previously won positions after the ECB's statements.
Today, a rather interesting report was published, which indicates that controlling the yield curve will help the ECB to link monetary and fiscal policy. We are talking about the ECB's ongoing asset acquisition program under PEPP, which allows us to control the yield curve, which is a subtle link between fiscal and monetary policy. The desire to keep yields at minimum levels through the PEPP asset purchase program indicates the desire of the European Central Bank to do everything possible so that the economies of different countries can easily access the liquidity they need. Recently, the ECB increased purchases of long-term German government bonds, which protected them from distorting the yield curve of US securities. The Central Bank has also recently acquired more short-term Italian assets, hoping for a further decline in the spread, which has been observed recently due to the stabilization of the situation in the economy.
In the afternoon, the focus will be on a speech by European Central Bank President Christine Lagarde. It is unlikely that she will say something new, however, it is worth listening to her in the future. If the market does not hear a new leading indicator, as the Federal Reserve has been doing recently, then demand for the euro may resume, and by the end of the year, we will see updates to the 22nd and 23rd figures. If Lagarde intervenes verbally, pointing out the likelihood of negative interest rates being introduced next year, demand for the euro may decrease, and the EURUSD pair may collapse to new weekly lows. The fact that the ECB statement did not say anything about the euro exchange rate is alarming in itself.
As for the strength of the US dollar, its prospects depend on the decision of lawmakers. Here everything is at the mercy of American lawmakers. If they are unable to agree on another fiscal stimulus program in the near future, demand for the US dollar may increase. So far this week, there is no news on the negotiations, and the proposed program of assistance to the US economy in the amount of 916 billion US dollars is still hanging in the air. But even if the US dollar rises in the near future against the euro, its sales will become more active as the US Federal Reserve meeting, which is scheduled for December 15-16, approaches. The Fed is expected to decide on further monetary easing.
As for the technical picture of the EURUSD pair, it remained unchanged. If Lagarde's speech today puts pressure on the euro, the fall will continue to the area of lows 1.2040 and 1.1980. It will be possible to talk about the resumption of bullish momentum only after the breakout of the resistance of 1.2145, which will open a direct path to new annual highs in the area of 1.2250 and 1.2340.
And now some news from Brussels, where the European Commission offered the UK a one-year fishing agreement, which led to a major drop in the pound to this week's lows. Such a proposal indicates that no one will make concessions on this issue, and it is almost a key one in the trade agreement for the UK, although it does not represent any economic benefits.
Today, it became known that the European Commission has proposed measures in case a trade agreement between the UK and the EU is not reached. These measures include the conclusion of a one-year fishing agreement. European Commission President Ursula von der Leyen also put forward a proposal to extend the current rules for interaction and security in air transport for six months, adding that negotiations are continuing. However, the pessimism of market participants who close their long positions on the pound is visible.
David Jones, the former Brexit Minister, reacted angrily to the European Commission's contingency plans. According to him, the proposed measures are actual blackmail and piratical behavior on the part of the EU. Jones also noted that it is likely that Boris Johnson will respond harshly to this proposal, as this is intimidation and extortion of a trade agreement at the very last moment.
The British pound is already near its weekly lows, testing the support level of 1.3245. Its breakdown will lead to a larger decrease in the trading instrument already in the area of the lows of 1.3120 and 1.3030. It will be possible to talk about the return of GBPUSD above the resistance of 1.3340 only if there is good news from participants in trade negotiations. In this case, the pound has a chance to recover to the area of 1.3440 and 1.3600.