A dovish ECB could weigh on euro

The euro is treading in calm waters on Wednesday, ahead of the ECB policy meeting tomorrow. Currently, EUR/USD is trading at 1.1595, down 0.01% on the day.

ECB policy meeting next

‘The times they are a changing’ are for major central banks. With the Fed, BoE and other central banks looking to tighten policy, there is pressure on the ECB, which remains in accommodative mode, to join the bandwagon. ECB President Christine Lagarde has insisted that eurozone inflation is transitory, a message we have heard often from Jerome Powell at the Federal Reserve. However, with no sign that inflation in Germany or the rest of the eurozone will ease anytime soon, it is becoming harder for the ECB to ignore the threat of high inflation, especially with the surge in energy prices only adding to inflation levels. Eurozone CPI hit 3.4% in September and is expected to rise to 3.7% in October, which would mark a 13-year high. In Germany, inflation has accelerated for three straight months and climbed to 4.1% (YoY) in September, its highest level since 1993.

Rising inflation is new territory for the ECB, as inflation has continuously fallen short of the bank’s inflation target of 2 per cent. In September, Lagarde said that the ECB was “pretty far away” from raising interest rates, but there is a growing belief in the markets that the ECB may have to raise rates in 2022 if inflation does not ease lower.

The upcoming ECB meeting is unlikely to shake up the markets, unless the bank unexpectedly veers to a more hawkish position. The December meeting should be much more lively, as policy makers may signal their plans for the Pandemic Emergency Purchase Programme (PEPP), which is set to expire in March 2022.

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EUR/USD Technical

• EUR/USD faces resistance lines at 1.1628 and 1.1685
• EUR/USD tested support at 1.1588 earlier in the day. Below, there is support at 1.1531

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