Euro bounds higher on news ECB rate-setters saw a 'unanimous need to act'

The European single currency bounded higher and government bond yields on the periphery caught a bid after the European Central Bank ramped-up its latest emergency bond buying programme.

To the surprise of markets, the ECB increased the size of its Pandemic Emergency Purchase Programme by a further €600bn - which was more than the €500bn that had been expected - taking the total to €1.1trn.

Members of the Governing Council agreed on an extension of PEPP from year-end 2020 to the middle of 2021.

The decision was perhaps all the more noteworthy given the recent ruling from Germany's Constitutional Court which questioned the justifications provided for another of the ECB's asset buying programmes.

In response to journalists' questions on Thursday afternoon, ECB president, Christine Lagarde, repeatedly stressed that the ruling from the CC in Karlsruhe was directed at two parties, the German government and that country's parliament.

She also stressed the primacy of the European Court of Justice, which was legally mandated with oversight of the ECB, over national courts.

Also worth noting, when asked if Thursday's decision had been unanimous, Lagarde said there had been "a unanimous view that action had to be taken".

In response, as of 1629 BST, euro/dollar was bounding higher by 1.05% to 1.1351 while the yield on the benchmark 10-year Italian government note had retreated by 14 basis points to 1.425%.

Andrew Kenningham, chief Europe economist at Capital Economics, highlighted how there was "more agreement on the Governing Council than on many previous occasions".

He believed it was "almost certain" that the increase in PEPP had the support of all GC members and of the national central bank governos of France, Italy and Spain - "if not Germany".

Nevertheless, an increase in PEPP might still be required, the ECB will probably need the programme to last indefinitely instead of being a temporary measure and it might yet succumb to a successful legal challenge, he said.

Finally, once the pandemic crisis passed, support for emergency measures could wane even as the Italian government clashed with Brussels over the Stability and Growth Pact.

"We expect Italy’s sovereign debt burden to continue rising over the medium term, putting pressure on the ECB to (effectively) continue to bank-roll it.

"The Governing Council can take a breather for now, but it will need to be prepared for more battles in the months and years to come."