- The ECB is set to strike a more dovish tone following its strategic review.
- Lower inflation could push ECB President Lagarde to extend its bond-buying scheme beyond March.
- The rapid spread of the Delta covid variant is another reason to paint a pessimistic view, weighing on the euro.
Sell low, cover even lower – that could be the best strategy for trading the European Central Bank's upcoming decision with EUR/USD. While the common currency has been holding up better than some of its peers, this could be due to pre-ECB tensions rather than any material advantage.
Here are three reasons to expect the Frankfurt-based institution to trigger falls:
1) Strategic review
This July 22 meeting comes exactly two weeks after the ECB presented its long-awaited strategic review in which it ditched its "Below, but close to 2%" inflation target in favor of just 2%. That is a dovish shift that the bank would want to follow up on, to show it is serious.
However, ECB President Christine Lagarde left market participants somewhat confused when she rejected a Fed-like targeting of average inflation – allowing future price rises to compensate for previous bouts of low inflation. On the other hand, she did say the bank could exceed its 2% target. Clarification is the name of the game, and it could be toward the downside.
Sending clearer messages is another pillar of that strategic review, which is now set to be implemented.
2) Lower inflation
Apart from the theoretical long-term goals, the most recent data suggest price rises are decelerating once again. The headline Consumer Price Index dipped to 1.9% in June, compared with 5.4% in the US. Core CPI edged lower to 0.9% – and has never received a post-pandemic boom. It stands at 4.5% in the US.
Underlying price pressures are nowhere to be seen:
Source: FXStreet
Apart from sending clearer messages about the future, the ECB could act and announce it is extending its Pandemic Emergency Purchase Program (PEPP) beyond March 2022. To appease the hawks, Lagarde may say that an extension of the bond-buying scheme could have a different form.
3) Delta force
The most immediate concern is COVID-19 – and the rapid spread of the Delta variant. Infections have been surging in the Netherlands, Spain, and Portugal – but moving higher in other places as well. It threatens to derail the recovery and the ECB's economic forecasts.
Source: FT
While roughly half the EU's population is fully vaccinated – and 70% of adults have received one-shot – the pandemic is far from over. For countries dependant on tourism, the summer is over before it began. The bank publishes new projections for growth and inflation only in September, but Lagarde could send a warning shot already now.
If she hints that a depressed outlook could warrant further monetary stimulus, the euro would fall.
Conclusion
The ECB's July meeting is the first after the dovish strategic review and the bank could be eager to deliver – or at least promise – looser policy to show it is serious. That is easier amid the severity of the Delta covid wave.
Delta Doom is set to storm America, the dollar could emerge as top do
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD hovers around 1.0800 on Fed's decision
EUR/USD returned to the 1.0800 price zone after the Federal Reserve announced its decision to cut the benchmark interest rate by 25 bps as widely anticipated. Chair Jerome Powell's remarks put mild pressure on the US Dollar.
USD/JPY retreats from weekly highs as FOMC delivers 25 bps rate trim
USD/JPY hovers around 153.80 after the Fed broadly met market expectations on November's rate call. The Fed delivered a follow-up quarter-point cut on Thursday; markets now bet on the odds of a December three-peat.
Gold regains $2,700 with Fed’s announcement
Gold extends its recovery following Wednesday's sharp decline and trades above $2,700, as the US Dollar eases following the Federal Reserve's decision to cut rates by 25 bps. Powell's speech revolved around Trump's victory.
Ethereum Price Forecast: ETH eyes $3,366 as open interest growth could fuel quest for new all-time high
Ethereum (ETH) is up nearly 8% on Thursday and could reach a new all-time high before year-end following increasing investor demand for the top altcoin. This is visible in ETH's open interest growth and increasing Ethereum exchange-traded funds (ETF) inflows.
Outlook for the markets under Trump 2.0
On November 5, the United States held presidential elections. Republican and former president Donald Trump won the elections surprisingly clearly. The Electoral College, which in fact elects the president, will meet on December 17, while the inauguration is scheduled for January 20, 2025.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.