The European Central Bank (ECB) met last week and expanded the bank’s Pandemic Emergency Purchase Programme by €600 billion. There has been a significant deterioration in the growth outlook, calling for additional monetary stimulus. Remi Tetot from Real Vision states that the ECB will have to buy their way out of the COVID-19 pandemic. He projects that their balance sheet will explode to the €8 trillion level, as the graph below indicates a significant growth rate.

ecb balance sheet

Furthermore, Tetot states that as the ECB’s Balance Sheet is growing, excess liquidity will follow. The graph below depicts the ECB’s balance sheet (€ Billion) alongside their excess liquidity (€ Billion).

excess liquidity

When there’s excess liquidity, there is only one way for the Euro to go, especially when we look at the ECB’s balance sheet expansion as a percentage of FX traded daily. When there is excess liquidity, there is technically more money in the entire banking system than what is needed. Along with very slow economic growth, there is nowhere for the money to go. As such, a decline in the value of the Euro can be expected.

central banks bs

Furthermore, the fall of the Euro is especially evident from the excess liquidity currently in the market, and he expects it will break its all-time support, as depicted in the graph below.

excess liquidity 2-1

The decline of the Euro can partly be attributed to the slowing economy due to COVID-19, and the Dollar’s ability to retain its strength. With the uncertainty in the market remaining, the volatility of the Euro can be expected.