ECB Makes Minor Dovish Tilt

Adam Lemon

The European Central Bank today held its long-term refinancing rate policy steady by maintaining a rate of 0% and made no other change except a small adjustment to its forward guidance. The relative value of the euro rose slightly, so it is not clear the release has had any meaningful effect on market prices at all.

ECB Rate Hike Outlook

In its regular monthly policy release on 22nd July 2021, the European Central Bank left its main refinancing rate at 0% and announced no change to its bond purchase program, as had been widely expected. However, there was a small change to the language used within its monetary policy statement which pointed towards a more accommodative emphasis:

“…. the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent…. This may also imply a transitory period in which inflation is moderately above target.”

The ECB here is saying that it will be more accepting of higher inflation, even beyond 2%, without feeling the need to respond by tightening monetary policy. As inflation is much lower in the ECB than it is in the US, with core CPI still below an annualized rate of 1%, the ECB are not realistically expecting inflation to exceed 2% any time soon. So, what they are really saying is, no rate hikes for a long time, even longer than the long time they were already talking about next month.

ECB Impact on Euro and Stocks

The euro gained modestly against a basket of currencies following the statement release and press conference, rising most strongly against the US dollar and the Japanese yen. This is in line with the broader market environment as these safe havens had been falling anyway and giving up earlier gains.

European stock markets had been rising before the ECB’s release, but were modestly lower an hour or two later.

What Does This Mean for Traders?

Forex traders can say that the fundamental analysis of the euro just arguably got very slightly more bearish. However, wiser traders who know that technical factors are more important will see that the euro is a bit higher over most other currencies, and importantly the EUR/USD currency pair is not only failing to break to new long-term low prices below the lower trend line of its wide medium-term bearish price channel but is threatening to get established above the resistance level at 1.1823. A sustained break above the resistance level at 1.1850 would completely invalidate the bearish channel.

EUR/USD 30m Price Chart 15/07 – 22/07/2021

EUR/USD 30m Price Chart 15/07 – 22/07/2021

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy

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