The ECB decision yesterday involved a balancing of two factors – rising inflation and the prospect of a longer-term crisis between Russia and Ukraine.

The last inflation printout of the Eurozone tells us that inflation is high coming in at 5.8% y/y vs 5.6% expected. The print got the attention of ECB’s Lane, one of the ECB’s more dovish members, who came out at the start of March assuring markets that the bank would act to contain rising inflation. So, the question going into the event was would the ECB hold back the end of QE in order to cushion any potential blow from the Ukraine/Russia crisis?

The ECB did recognise the risk from Russia, but in the statement, it was the risk from inflation that got the most attention. The ECB’s decision was to end asset purchases in Q3. €40 billion in April, €30 billion in May, €20billion in June and then QE to end, as long as the ECB still consider the medium-term inflation outlook will not weaken. Interest rate hikes are to commence after the end of QE. So, the door is kept open for a 2022 rate hike. This means that inflation pressure trumps Russian risk for now.

Press Conference

The ECB significantly revised their inflation forecast for this year higher to 5.1%. However, they still expect inflation to drop to 2.1% in 2023 and still see inflation dropping over the medium term. Energy costs have been seen as the main driver of inflation and the ECB noted that inflation rose over 31% in February alone. The Russian/Ukraine crisis got more attention in the Press Conference and Christine Lagarde said that risks to the economic outlook are now tilted to the downside. This was seen as a risk to even higher energy prices too. Covid risk is fading which got a mention too and bodes well for the eurozone economy should the Russian risk fade away. The overall feel of the Q& A in the Press Conference is that the ECB want to be maximally agile and flexible. They want to respond to the situation as it develops.

The takeaway

This keeps the 1.0800 area as support for now as the ECB is still on track to end QE and hike this year. However, if the Russian risk escalates then the ECB is prepared to change track and that would mean a fall through 1.08000. See the trendline marked below on the weekly EURUSD chart.