All eyes will be on the European Central Bank (ECB) meeting on Thursday. The ECB is widely expected to leave monetary policy unchanged. However, it may be unwise to label this event as a snoozer given how this will be their first meeting since the conclusion of the strategy review.
Before we take a deep dive into what to expect on Thursday, it is worth keeping in mind that the euro has appreciated against most G10 currencies this month, excluding the dollar, yen and swiss franc.
Interestingly, the EURUSD is trading below the 1.1800 level as of writing with the path of least resistance pointing south as the dollar appreciates. How the currency pair concludes this week is likely to be influenced by what happens during the ECB meeting.
There are some of key things to look out for during Thursday's policy meeting.
- With the new inflation target of 2% established (up from “below, but close to 2%) and the ECB allowing inflation to overshoot the target, investors will be looking for any change in central bank's forward guidance. A potentially more dovish shift in the policy stance is likely to inspire euro bears.
- It will be interesting to see whether the ECB addresses what happens to the mammoth 1.85 trillion-euro Pandemic Emergency Purchase Programme (PEPP) which expires in March 2022. As of now, PEPP is not due to be reviewed until September when the latest staff forecasts are released.
- Given how inflation remains a hot topic across the board, market players may be watching to see whether the ECB says anything about the latest CPI figures. Eurozone inflation cooled in June to 1.9% from 2.0% in May.
- If there is any mention of the Covid-19 menace and risks it presents to the Eurozone economy. According to a Reuters tally, Europe has become the first region worldwide to cross 50 million coronavirus cases. As the more contagious Delta variant spreads its poisonous tentacles across the region, this may fuel concerns over the continent’s economic recovery.
- Let’s not forget about ECB President Christine Lagarde's press conference. Lagarde expects the PEPP to continue to at least March 2022 but it may be followed by a ‘transition into a new format’. If she adopts a dovish and cautious tone on Thursday, this may result in a weaker euro. While the ECB is unlikely to sound hawkish, any surprises could send the euro charging higher.
Redirecting our attention back towards the technicals, the EURUSD remains under pressure on the daily charts. There have been consistently lower lows and lower highs while the MACD trades below zero. Sustained weakness below the 1.1800 level could signal a decline towards 1.1704. Should bears break through 1.1704, the next key point of interest can be found at 1.1620 - a level that has not been seen since November 2020.
Alternatively, a strong move back above 1.1800 could trigger an incline towards 1.1860 and 1.1900, respectively.