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The ECB’s meeting this October really turned out to be fateful. The market did not expect that the European regulator would recognize the detrimental effect of inflation and, as already thought, would follow the Fed’s footsteps.
The meeting itself and its results did not bring any surprises. The bank left all the parameters of monetary policy unchanged, but the speech of its head, C. Lagarde, had the effect of an exploding bomb.
How did this manifest itself and what are its consequences?
Earlier, it was assumed that the European regulator, remaining in the wake of the Fed’s monetary policy, would eventually move forward. The ECB seems to have finally realized that mantras and empty hopes will not be able to return the inflation rate to an acceptable level of 2.0%. Like Powell, Lagarde said that the inflation growth will be temporary, not realizing that the causes of this phenomenon are fundamentally strong and only their exclusion will help curb price growth. And the main reasons were thoughtless incentive measures that were carried out not only during the pandemic but also earlier after the 2008-09 crisis. Pumping the region’s economy with an unsecured money supply, the ECB’s policy stumbled on the COVID-19 crisis, which exposed all the harmfulness of such measures.
The ECB Chairman actually announced at a press conference that the Pandemic Emergency Procurement Program (PEPP) will be completed in March next year, which is in full accordance with the Fed’s expected measures. This news forced the market to believe that the regulator will begin the process of raising interest rates in the middle of next year, and not at its end or even in 2023. However, the ECB would not be the ECB if it didn’t make it clear that some of the old stimulus programs will still be preserved, and perhaps, even some new ones will be applied to compensate for the blow to the economy of the region, which has sat tightly on the stimulus measures caused by the termination of antiquarian measures.
In fact, it will be possible to say that the Central Bank will shower the markets with liquidity with one hand and withdraw it with the other, which is economically unnatural. But in the current situation, there can be nothing else against the background of the quality of the governing elites, both in politics and in the economy of Europe. This means that the cart called the “European economy” will definitely move on to economic collapse.
Nevertheless, these are the prospects for the future, and what should be expected from the euro in the currency market now?
We believe that if the euro’s strengthening, for example, against the dollar, has not ended, then it will still be limited. This is because both the Fed and the ECB are implementing similar economic measures in their own economies. At the end of the November meeting, Powell will also announce measures to reduce the QE program, which will completely neutralize all the limited strength of the euro, which means that the main currency pair will return again to the range, trading with local surge both up and down.
Forecast of the day:
The EUR/USD pair noted its first target at 1.1665, and its limited growth may continue today amid the publication of the EU’s inflation data. If this strengthens, it may locally support the growth of the pair, which will rush to the second target of 1.1700 or even higher to 1.1725.
Spot gold could also get support if EUR/USD rises higher. The breakdown of the level of 1805.00 may allow the price to surge to 1830.00.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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