The European Central Bank exceeded the expectations of many traders on the result of its meeting held on Thursday, Septemeber 10, 2020. Despite many negative signals, members of the regulator and ECB President Christine Lagarde managed to uplift the euro. The most pessimistic scenarios did not materialize, and yesterday's insider from Bloomberg, on the contrary, was confirmed. All this allowed the buyers of the EUR/USD pair to test the area of the 19th figure and update the weekly high. Looking ahead, it should be noted that this is not enough for the development of the upward trend: the bulls at least need to overcome the upper line of the Bollinger Bands indicator on D1 at the level of 1.1940 in order to aim at the main resistance level 1.2000.
Nevertheless, a serious claim for victory was made today. If the European Central Bank drowned the euro, then the buyers of the pair would have to rely only on the weakness of the US dollar. Now the factor of weakening the greenback will play an auxiliary, important, but still not decisive role. Lagarde did not press on the euro, while Powell played the role of an asphalt roller the week before last, stamping the dollar with his rhetoric. The updated strategy of the Fed will haunt dollar bulls for a long time, especially if US inflation grows at a slower pace relative to preliminary forecasts. The euro could repeat the fate of the greenback if the European Central Bank intimidated traders with a currency intervention at its conference. Or any other action that would reduce the attractiveness of the euro.
However, to the surprise of many experts, the ECB did not focus on the rise of the euro. Lagarde stressed that at the moment there is no need to "overreact to the growth of the euro." And although she added that the European regulator "will assess the impact of the euro on inflation," traders ignored this remark. The main thing is that the head of the ECB did not develop the idea expressed not so long ago by the chief economist of the Central Bank, Philip Lane, who criticized the too high rate of the euro. Many experts have initially feared that Lagarde would therefore announce a currency intervention, especially against the backdrop of a sharp decline in European inflation in August.
In general, the European Central Bank has voiced both optimistic and cautiously pessimistic theses. But since the market was ready for an unequivocally dovish mood, the results of the September meeting were in favor of the euro. For example, according to the updated forecasts of the ECB, next year inflation in Europe will accelerate. The regulator has revised its June forecasts upward. As for this year, according to Lagarde, in the coming months, overall inflation will be negative. This is particularly due to energy prices, which are putting downward pressure on inflation indicators. Assessing the overall outlook, Lagarde noted that the pace of European economic recovery is "broadly in line with forecasts." Against the backdrop of these findings, the ECB's Governing Council decided to leave its bond-buying program at 1.35 trillion euros, keeping the Deposit rate at -0.5%.
In addition to this, Lagarde also stressed that repeated outbreaks of coronavirus could significantly slow down the recovery process. As you know, an increase in the incidence of COVID-19 is recorded, particularly in France, Spain, and the Czech Republic. And although the EU leadership and the governments of the aforementioned countries do not intend to reintroduce the lockdown, the general uncertainty, and increased quarantine restrictions negatively affect both the consumer activity of Europeans and the labor market.
Lagarde also remembered Brexit for the first time in a long time. And for good reason: relations between London and Brussels have sharply deteriorated against the backdrop of the British government's intentions to adopt a resonant law that will actually "cross out" one of the points of the deal. The Inland Markets Bill, under consideration by the UK Parliament, regulates trade between some parts of the UK, particularly England, Scotland, Wales and Northern Ireland after the end of the transition period (that is, from 1 January 2021). According to its rules, ministers of the British government will be able to change or even cancel the rules of customs transport if the UK and the EU do not sign a trade agreement. In addition, the bill prescribes the supremacy of the British government's decisions "in cases of conflict with international law."
Boris Johnson's initiative drew extremely sharp criticism from many politicians, both European and British. Many conservatives were also outraged, since the British government, is ready to violate international law. Some analysts assess the British prime minister's behavior as a bluff, which is intended to persuade Brussels to compromise in negotiations with London. But traders reacted rather nervously to the recent events - for example, the pound collapsed throughout the market, reaching 1.5-month lows together with the dollar.
The euro-dollar pair also suspended its growth. There hasn't been such an escalation in relations between the EU and Britain for a long time, so the situation has returned in favor of the euro. However, in the medium term, the pair retains a probable upward trend. By and large, the European Central Bank allowed the euro to go up, so traders will continue to test the strength of the ECB's patience. The upward breakdown of key resistance levels depends on two factors: first, the dynamics of US inflation (the release is scheduled for Friday); secondly, the vote for the above draft law in the British Parliament. In my opinion, here the emphasis should be placed on American statistics since British events are of an emotional and political nature. Judging by the reaction of the world community and many British politicians, the bill will not receive support from most conservatives. Therefore, the influence of this factor will be of a short-term nature - exactly until the moment of voting.
Thus, long positions on the EUR/USD pair prioritized. Trading decisions should be made based on Friday's release. It is better to open longs on price downturns with the first target at around 1.1930 (the upper Bollinger Bands at D1) and the main target at around 1.2000. Stop loss can be placed at 1.1680 (the upper border of the Kumo cloud on the same timeframe). If the price drops below, the upward trend may temporarily be suspended.
