ECB likely to disrupt euro’s calm

The euro is drifting in Thursday trade. In North American trade, EUR/USD is trading at 1.1786, down 0.07% on the day.

It has been a very quiet week for the euro, which has been hovering close to the 1.18 level. The lack of movement could change later today, as the ECB holds a policy meeting (11:45 GMT).

ECB expected to change forward guidance

Investors are always hungry for clues about a central bank’s future monetary policy. The expectation that the ECB will make changes to its forward guidance at today’s policy meeting has investors swirling around like bees on a honeycomb. ECB President Christine Lagarde has said that the central bank’s forward guidance, which is its tool to communicate policy outlook, will have to be aligned with its new strategy review.

What key changes can we expect from the ECB? The strategy review raised the inflation target to 2%, which is a slight adjustment from the previous “below, but close to 2%” target. As well, the review stated that the Bank would allow inflation to overshoot the target if it was a “transitory period”.

The new fixed inflation target of 2% could have significant implications for the euro. Since core inflation is running well below 2%, the ECB will have to maintain a vigorous easing bias in order to coax inflation up to the target. This dovish policy will likely weigh on the euro. We could see some sharp volatility around EUR/USD during the day.

There has been a lack of economic events this week, as the global calendar has been very light. The markets will get a chance to sink their teeth into some tier-1 data on Friday, with the release of Service and Manufacturing PMIs for June. Both sectors are performing well, with the PMIs expected to show strong expansion across the eurozone.

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EUR/USD Technical

• EUR/USD is putting pressure on support at 1.1759. Below, there is support at 1.1711
• On the upside, we have resistance at 1.1867 and 1.1927

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-event

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