ECB snapshot: Lagarde will be accommodating as she conducts home strategic review
While many global central banks have started to cut back on asset purchases, the ECB is in the same boat as the US Federal Reserve: no cut anytime soon. This became even clearer when the European Central Bank released the results of its strategic review. As inflation is expected to increase (albeit transient), the wording has been changed to target a “symmetrical 2%”, rather than “below, but close to 2%”. The indications are that the central bank expects inflation to rise to 2.5% by the end of the year, before slowing to 2%. For reference, the Eurozone CPI released last week was 1.9%. Christine Lagarde declared that “the wording removes any possible ambiguity and resolutely conveys that 2% is not a ceiling”.
The committee is expected to keep the overall amount of the Pandemic Emergency Purchase Program (PEPP) unchanged at 1.85 trillion euros. However, it is possible that they will extend the duration of the program beyond its expiration in March 2022.
Staff projections will also be released at the next meeting. Views on growth and inflation may vary, but the strategic review has already revealed the dovish story to traders.
There is also the issue of the growing number of coronavirus cases due to the Delta variant. This should keep the ECB in a ‘wait and see’ mode while waiting to see if more restrictions and lockdowns will be needed for eurozone countries.
EUR / USD was in an ascending wedge from its low on March 31, near 1.1704. The pair broke lower in late May after hitting a high of 1.2266. The expected target for an ascending wedge is a 100% retracement, or 1.1704. During the recent downward movement, EUR / USD stalled near the 61.8% Fibonacci retracement level from March lows to May highs and formed a flag pattern. The target of a flag pattern is the length of the flagpole added to the break point. This also targets the 1.1700 area.
Over a period of 240 minutes, the EUR / USD declined from the flag’s break level in an orderly descending channel. Support is on the lower trendline of the channel near 1.1740, just ahead of the 1.1702 targets. Resistance is on the upper channel trendline near 1.1850 and then horizontal resistance from the flag pattern highs near 1.1975. The psychological resistance of the round numbers of 1.2000 is just above.
Word of caution:
With prices approaching targets and a support level near 1.1704, we may see a “sell the rumor, buy the fact” type of trade in which prices have fallen after the strategic review in the market. expectation of an accommodating ECB. Traders may look to buy EUR / USD after the ECB as they try to eliminate weak shorts.