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The ECB sounds dovish tones

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(Kitco News) - ECB leaves rates unchanged as expected - Prior to the event, ECB policy was expected to remain unchanged, but there does seem to be a dovish tilt. The bank said In the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism, and flexibility in the conduct of monetary policy.

Money markets are now pricing in a 64 bps hike by the end of the year down from 68bps.

APP schedule is also unchanged:
€40 bln APR
€20 bln May
€20 bln June

The ECB said the data reinforces expectations that APP should end in Q3

Rates will rise sometime after the full taper 

The same questions have been asked about inflation and how it could impact the ECB moving forward.

There is still the lingering cloud of the Russia/Ukraine war over the decision-making process. 

The market had been looking for any hawkish changes in the statement. 

Prior to the event, Deutsche Bank noted “We are not expecting much change to the ECB’s message. Instead, they think that when the new staff forecasts are available in June, they’ll announce that APP purchases will end in July, ahead of liftoff in the policy rate in September, so an underlying direction of travel that’s becoming clear. Our view is that the risks are tilted towards a more hawkish, rather than a less hawkish tone though, and as a reminder, we changed our call last week to expect a more aggressive ECB exit given the deteriorating inflation outlook, and now see the terminal rate reaching 2% by end-2023, which is 250bps higher than at present.”

In an initial reaction to the event, EUR/USD fell heavily as traders are expecting less action on rates and the governing council announce its intentions to act again if data starts to worsen. EUR/USD is now 0.25% lower on the session trading at 1.0865. Risk also took a slight spike higher. The DAX and gold also pushed a bit on the shorter-term charts and it seems the ECB is willing to tolerate a looser stance for a while longer. The rest of the world's central banks seem to be willing to be more aggressive and just recently the RBNZhiked 50bps over the 25 that was expected. All eyes will turn to comments from President Lagarde.

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