Euro Stoxx 50 price dips despite ECB decision and EU budget approval

Euro Stoxx 50 (SX5E) price closed the week over 1% in the red despite two positive catalysts that occurred on Thursday and Friday. 

Fundamental analysis: ECB increases its PEPP by €500 billion

In a meeting that took place on December 10, the ECB decided to leave interest rates unchanged, in line with analysts’ expectations. However, the ECB decided to increase the size of its Pandemic Emergency Purchase Programme (PEPP) by €500 billion.

Analysts were widely expecting ECB to increase its stimulus package given the fresh lockdown measures introduced across Western Europe. 

“With the positive news in terms of vaccine development, Europe is now starting to see the light at the end of the tunnel,” Oxford Economics said. 

“However, the short-term outlook remains extremely challenging, with eurozone GDP likely to contract in the fourth quarter.”

The central bank expects inflation to stay below its 2% target even in 2023, which would make it an 11th consecutive year the bank would fall short of its goal.

“The ECB’s tools may be most effective at calming markets in crisis situations and keeping financial conditions very easy via a ‘low for very long’ stance,” said Greg Fuzesi, an economist at JPMorgan. 

“But, when monetary policy is already doing a lot, it looks more constrained when trying to give the economy an extra kick to boost inflation closer to the target.”

Moreover, EU member states have finally reached a consensus on the massive recovery fund. The package, agreed earlier this year, was finally approved after Poland and Hungary lifted their opposition to the deal.

Technical analysis: Equities rotate lower

Despite two major positive catalysts, Euro Stoxx 50 rotated lower this week to close 1.1% in the red. This is after the price action printed a 9-month high at 3355.3 earlier this week.

EuroStoxx50 weekly chart (TradingView)

The price movements are now approaching the key short-term support line at 3450, with a confluence of two critical moving average lines located at 3355 and 3396. On the upside, an important resistance line sits near the 3600 handle.

Summary

The European Central Bank moved to launch fresh stimulus measures to support the economic recovery of its EU member states amid the pandemic.

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