The European Central Bank officially announced the revision of its monetary policy yesterday, introducing a new target for inflation. This is a widely expected event that was supposed to happen at the beginning of last year, but the coronavirus has made its own adjustments to the regulator's plans.
The new strategy of the ECB did not surprise the market participants. The relevant information about the decision was leaked to the press even before yesterday's speech by Christine Lagarde. So when the ECB President confirmed the rumors, the euro reacted with growth including in a pair with the US currency. The European Central Bank did not present any additional disappointing surprises, so buyers of EUR/USD were able to organize an upward correction, despite the fact that the news itself is naturally "dovish".
It can be recalled that ECB's previous policy provided a fairly flexible benchmark for inflation, which was supposed to be slightly below the 2% mark, but according to the new strategy, the target level was set strictly at 2%. At the same time, the European regulator hints the possibility of a "transition period", during which inflation may moderately exceed the target indicator. This means that it may exceed the 2% target under certain conditions, and will not entail the adoption of immediate retaliatory measures.
There are obvious consequences of implementing this strategy. The new strategy will allow the European regulator to maintain the current parameters of monetary policy even in the face of an inflation surge in the EU. In practice, the ECB's behavior would not change in any case in the near future, given the slowdown in inflationary growth. The latest release on the growth of the consumer price index in the eurozone came out in the "red zone". Both the general index slowed down in June, reaching 1.9% after the May growth to 2%. At the same time, the pivot index turned out to be 0.9% after the previous growth to 1%.
If we talk about longer-term prospects, it can clearly be concluded that an increase in the key rate is even less likely now, relative to earlier forecasts. Most analysts believe that the ECB will raise it no earlier than the second half of 2024. It is worth noting that according to the Fed's median forecast, the US regulator may raise the rate as early as 2023, and twice.
In general, the uncorrelation of the positions of the ECB and the Fed is becoming stronger. This fact will serve as the main driver for the EUR/USD pair. But it can be said that the Americans were ahead of events in this regard. At the end of August 2020, the Fed revised its monetary policy strategy, becoming more "tolerant" of rising inflation. The updated strategy of the US Central Bank also allows the regulator to keep base rates at the current record-low level for a longer time. This means that the Federal Reserve agreed to tolerate inflation at a level above 2% (without tightening the parameters of monetary policy) in the summer of 2020. This fact exerted the strongest pressure on the US dollar, including in a pair with the Euro currency.
However, traders of the EUR/USD quite calmly received ECB's new strategy yesterday. The pair did not leave the level of 1.18 despite intraday volatility, continuing to trade in the range of 1.1780-1.1900. This is partly due to the fact that the ECB's decision was a widely expected event that was discussed in the expert environment for a long time. In addition, all the parameters of the new strategy coincided with the forecasts – this fact also played a role. Thirdly, the European Central Bank has adjusted its medium-term inflation target to a certain value, raising it to 2% (only allowing a short-term excess of this target), while the Fed quite vaguely defined the "red lines" last year.
There were various scenarios among analysts at that time, including the worst ones for the US dollar – for example, some currency strategists assumed that the regulator would "tolerate" 3% inflation while keeping rates at a low level.
All these factors allowed traders of the EUR/USD pair to go for a correction immediately after the announcement of the ECB decision. However, can this fundamental factor serve as a reason for a large-scale price increase? In my opinion, no. The actual uncorrelation between the positions of the Fed and the ECB has not disappeared, exerting background pressure on the pair. After the results of the June meeting, the US Federal Reserve significantly tightened its rhetoric, providing significant support to the US currency. At the same time, most ECB representatives continue to voice "dovish" rhetoric – both in the context of the prospects for QE and in the context of the prospects for an interest rate increase.
In this case, the corrective pullbacks of the EUR/USD pair can still be used to open short positions with the first target of 1.1800. If we talk about longer-term prospects, the main target (support level) for the pair is the level of 1.1750 – the lower line of the Bollinger Bands indicator on the daily chart.
