EUR/USD added more than a figure on Thursday, rising to almost 1.1700 after the ECB meeting. The central bank expectedly kept its monetary policy unchanged. So why did the single European currency strengthen and how long can the rise continue?
The ECB meeting took place without any changes to monetary policy parameters, as expected. In such a case, the central bank is usually expected to make a statement, this time about inflation and related plans.
The European central bank is now continuing its ultra-soft monetary policy. Apart from the 0.0% interest rate, the Pandemic Emergency Prediction Program (PEPP) in the region remains in operation. The printing press is running at full speed to keep the economy going.
That would be fine, but inflation, which for years was teetering on the brink of deflation in the Eurozone, has soared to unprecedented levels. In September it rose to 3.4% and is forecast to be 3.7% in October. With a target of 2.0 to 2.5%.
Usually in such situations central banks start to tighten monetary policy. But so far, quantitative easing has not really been curtailed and there is no hint of a rate hike.
Why? Because some ECB members still believe that the rise in inflation will be temporary, as it is mainly caused by supply chain disruptions.
At the press conference after the meeting, ECB President Christine Lagarde said that the entire meeting was devoted to the topic of inflation. It was discussed from different angles and it was concluded that the consumer price index should be back to normal by 2022.
Why did the euro rise? Perhaps because before this week’s meeting the Euro had already fallen on expectations. Now it has regained its losses on the facts.
In addition, Christine Lagarde is expected to finally announce a tapering of stimulus in December, though PEPP is scheduled to end in March. In the meantime there is still little hope on the market that the ECB is underestimating the threats of rising inflation. Which means it could raise interest rates by the end of next year.
And what about the local targets? How long will the EUR/USD rise last?
The pair regained the weekly losses and approached a strong mirror resistance level near 1.1700. The price failed to rise above it in October. If a breakout fails this time as well, the EUR/USD might return to the low of the month near 1.1500.
In case of a breakdown and a consolidation above 1.1700, the pair will open the way for a further recovery. The nearest target would be the 1.1900 level.
02.30 Australian retail sales for September
11.00 Eurozone consumer price index for October
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