Euro drifting as ECB treads with caution

The euro has posted small gains in the Thursday session. Currently, EUR/USD is trading at 1.1827, up 0.10%.

The sole data event out of the eurozone was Germany’s trade balance for July. The reading of EUR 17.9 billion (MoM) was much stronger than the consensus of EUR 13.0 billion. A gain of 0.5% in exports and a decline of 3.8% in imports compared to June helped propel the July trade balance to its highest level since February.

ECB will scale back PEPP, but stays cautious

The ECB was widely expected to remain cautious at today’s policy meeting, and the central bank did not disappoint in that regard. The ECB did not make any changes to interest rates, but took a small step, saying that it would reduce its purchases under the Pandemic Emergency Purchase Programme (PEPP) slightly in Q4, compared to the previous two quarters. The Bank did not provide any hard numbers, but given that recent purchases have stood at 80 billion euros/month, expectations are that this will drop to 60-70 billion euros in Q4.

ECB President Christine Lagarde stressed that the reduction in purchases was not a tapering, which means that the reduction is a token step. Nonetheless, the move reflects an improvement in the eurozone economy, as growth and inflation are moving higher, even though the Delta variant of Covid has not been contained. Inflation has pushed above the ECB’s target of 2% and has hit a 10-year high. In response, the ECB has taken a page out of the Fed’s playbook, stating that the jump in inflation is transitory and inflation is expected to ease. If the eurozone economy continues to improve and inflation remains high, there will be pressure on the Bank to make further moves to reflect improving economic conditions.

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EUR/USD Technical

• On the upside, EUR/USD faces resistance at 1.1930 and 1.1983
• There is weak support at 1.1804, followed by support at 1.1731

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