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Bank of Canada could exacerbate the split within the ECB

Fundamental analysis of FOREX for April 22, 2021

Despite the fact that the Central Bank of any country primarily works for the benefit of its state, the policy of each regulator depends on the policy of the Central Banks of other countries. As a rule, the general direction is set by the Federal Reserve System (FRS), but now the Fed has deliberately chosen a pause and is passively observing what is happening from the sidelines. Therefore, some other Central Bank should take up the banner. Yesterday, such an attempt was made by the Bank of Canada, the first of the world’s central banks to announce a rate hike at the end of 2022 and a gradual curtailment of the asset purchase program.

Of course, the first about tightening monetary policy, in theory, should have been announced by the Fed, since the pace of economic recovery in the United States is significantly ahead of other countries. According to Reuters experts, in 2021, the US GDP will expand by 6.2%, which will be the best dynamics since 1984. The IMF calls 6.4%, the Fed itself calls 6.5%, and some experts predict 7% and more. In such conditions, the Central Bank should think about reducing liquidity in order not to let the inflation rise out of control. But due to the prolonged stagnation of consumer prices, the regulator considers the bursts of inflation to be a temporary phenomenon and does not believe in its growth above 3%. The Federal Reserve does not exclude that PCI will jump above 3% in the coming months, but rather quickly return to its usual levels.

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The Fed has taken a wait and see attitude, but this should not prevent other central banks from having their own opinions. If the Bank of Canada is the pioneer of tightening the policy, then other Central Banks may follow, including the European Regulator, in whose Council a split has long been brewing due to the dissatisfaction of some managers with the super soft policy of the regulator.

The market says the ECB’s hardliners have agreed to a proposal to expand the asset purchase program in the second quarter, with a prerequisite for cutting it in the third. The head of the Central Bank of the Netherlands speaks about the need to reduce monetary incentives in case of economic growth in the third quarter. The same point of view is shared by the President of the Bundesbank, who believes that incentive measures should not last indefinitely.

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Dynamics of weekly purchases of ECB assets under PEPP

So far, the “hawks” of the ECB are only watching the market’s reaction to their proposals. However, if we take into account the acceleration of vaccination rates in the Eurozone and the imminent launch of the European Rescue Fund, then the strengthening of EUR / USD looks quite reasonable.

I do not think that today Christine Lagarde will announce a revolutionary decision to tighten the ECB’s policy. The soft rhetoric is likely to be maintained at least until June, when new economic forecasts are released. However, if the markets do feel a split in the ranks of the Regulatory Council, then EUR / USD bulls will instantly activate. I think that the Forex trading strategy with buying a pair on pullbacks is the most effective at the moment. At the same time, the breakout of the April high will allow buyers to continue their offensive towards the targets of 1.2155 and 1.2180.

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