Heading into today’s ECB meeting, not a lot was expected and that is how it turned out in the end. ECB President Christine Lagarde re-iterated that the euro area still needs intensified support but was hopeful about the outlook as the European governments have finally got their act together on the vaccinations. The EUR/USD climbed initially then fell back as the dollar rebounded across the board.
The ECB left its macroeconomic assessment unchanged from March as there are still many uncertainties regarding the economic outlook. medium-term risks were “balanced”. The ECB still expects subdued rise in core inflation this year.
Crucially, the ECB dismissed mild speculation about tapering its bond purchases, with Lagarde saying that the Bank had not discussed it and that such a discussion was “premature”. This implies that that ECB will keep its QE taps wide open, potentially derailing the EUR/USD rally.
Fed to follow footsteps of BOC?
Investors are now slowing turning their attention to Fed’s meeting next week. Will the Fed do a BOC and surprise the markets with a hawkish decision? That’s what investors are going to be wondering now, which may underpin the dollar after a weak start to Q2 despite mostly positive news from the world’s largest economy. The US economy is in a much better position compared to a few months ago, thanks to government stimulus and the fast pace of Covid vaccinations. Indeed, we had more forecast-beating data as Jobless Claims fell more than expected.
So far the strength of US data hasn’t prevented the Fed from keeping the QE taps wide open. But if the improvement in data continues, it will only be a matter of time before the Fed tapers its emergency stimulus measures.
Against this backdrop, the dollar could be on the verge of a comeback, especially against currencies where the central bank is more dovish- such as the euro.
Meanwhile, the EUR/USD is showing a very interesting technical setup here – is recent price action a repeat of January-March period? As can be seen, the EUR/USD was initially falling at the turn of the year, before going into a period of consolidation (see green box). It then attempted a breakout from this consolidation, only for rates to turn sharply lower (blue box). Then, it went on to drop sharply over the next several days (grey box)
Source: ThinkMarkets and TradingView.com
If past price action is anything to go by then today’s refusal to hold above the previous day’s high could be a sign of things to come. A decisive break below 1.20 could send rates tumbling as technical selling complements the fundamental bearish view.