Euro drifting ahead of FOMC

The euro is showing limited movement on Wednesday. In the European session, EUR/USD is trading at 1.1274, up 0.14% on the day. It could be a busy couple of days for the euro, with the Federal Reserve and the ECB holding key policy meetings.

FOMC expected to accelerate taper

All eyes are on the FOMC policy meeting later today. We could see some dramatic announcements, the primary one being that starting in January, the Fed will double the pace of its monthly taper from USD 15 billion to 30 billion. This means that the Fed’s bond purchase scheme would end in March instead of July, setting the stage for a Fed rate hike soon afterwards. The dot plot at today’s meeting will be closely watched and could well be a market-mover. If the dot plot shows that two hikes are planned for 2022, the dollar could sag, while three hikes would likely provide a boost to the greenback.

The ECB holds its policy meeting on Thursday, and high on the agenda is the bank’s monetary support for the eurozone economy. The ECB’s 1.85 trillion euro emergency pandemic programme (PEPP), has been in place since March 2020, and policymakers are expected to confirm that PEPP will be terminated in March 2020. The loss of PEPP’s stimulus will be significant, and the ECB will have to decide what to do with the Asset Purchase Programme (APP), which is running at EUR 20 billion/month, once PEPP is done.

Here, however, there is dissension within the ECB, with hawks staunchly against increasing QE at a time that inflation is moving upwards in the eurozone.  The dovish ECB members want to double APP and maintain the bank’s ultra-accommodative policy. There could be a compromise in the works, such as keeping APP at current levels, while providing a mechanism to increase bond purchases if needed. The heavily indebted members of the bloc, such as Greece, have voiced concern that the removal of the PEPP could result in a ‘cliff effect’ which would hurt poorer bloc members.

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 EUR/USD Technical

• EUR/USD is putting pressure on support at 1.1245. Below, there is support at 1.1173
• There is resistance are 1.1372 and 1.1427

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