The European Central Bank’s decision to keep monetary policy unchanged surprised absolutely no body.
Instead the key question was regarding the appreciation of the euro. As it turned out, the central bank did discuss the single currency ‘extensively’ and admitted that it does put negative pressure on prices. As a result, Lagarde said the ECB will monitor the FX rate going forward but targeting a particular exchange rate is not in the bank’s mandate and that there is no need to overreact to its strength.
In other words, the current level of the exchange rate is not high enough to get ECB policymakers really worried. Put another way, at current levels, the exchange rate is high but not high enough to trigger a big response from the ECB.
It could be that the bank expects the exchange rate to decline anyway, owing to their projections that economic risks “remain tilted to the downside” and that inflation is likely to remain negative in coming months before turning positive in early 2021.
So, traders now know that the ECB is merely “monitoring carefully” the exchange rate and how this will impact price levels. Thus, what we could see going forward is further gains for the euro as trades probably try and milk the bullish trend as much as possible.
The first level of resistance that the bulls will now need to get past is around the 1.1900 area which was being tested at the time of writing. A clean break above here would target the liquidity residing above the 1.20 handle and this year’s high at 1.2011ish.
The bullish trend will remain intact for as long as rates hold above the recent lows circa 1.1750 on a daily closing basis. Until this level breaks, I would maintain a short-term bullish view on the exchange rate.
Source: TradingView.com and ThinkMarkets