ECB September meeting: preview

The euro-dollar pair continues to gradually decline, heading towards the base of the 18th figure. On the eve of the European Central Bank's September meeting, which will take place tomorrow, EUR/USD bulls are noticeably nervous: there is no trace of the former optimism left. The pair has been growing for almost two weeks, taking advantage of the weakness of the US currency. After Federal Reserve Chairman Jerome Powell's resonant speech at an economic symposium, dollar bulls could not recover for a long time. The potential timing of QE curtailment shifted from September to November (or even December), after which the greenback lost its foothold. Hawkish market expectations provided significant support to the dollar for almost the entire summer. But after Powell's dovish rhetoric, this house of cards collapsed.

The euro, in turn, on the contrary - at the end of the summer, its spirits rose. Contrary to pessimistic expectations, European inflation indicators continued to show positive dynamics in the second half of the year, exceeding the ECB's two percent target in July. In August, European inflation jumped again, reaching 10-year highs. The overall consumer price index was at 3.0% last month (after rising to 2.2% in July). Analysts expected to see this indicator slightly lower – at the level of 2.7%. The core index, excluding energy and food prices, jumped to 1.6% after the July increase to 0.7%.

analytics6138dd2a053b7.jpg

Such solid figures strengthened the position of the hawk wing of the ECB. Last week, some representatives of the ECB significantly tightened their rhetoric, calling for reducing the emergency purchase of bonds under the RERR program in the next quarter. The corresponding statements were made by the head of the Bank of France Francois Villaroy de Galo, the chairman of the central bank of the Netherlands Klaas Knot and the head of the central bank of Austria Robert Holzmann. In their opinion, this issue should be discussed at the September meeting.

Given this disposition, we can assume that tomorrow's meeting will be by no means a passing one. The results of tomorrow's meeting will certainly provoke strong volatility for the EUR/USD pair, and in my opinion, this volatility will not be in favor of the euro.

According to the overwhelming majority of analysts, the September meeting of the ECB will be extremely significant for the euro, since the central bank is likely to announce the reduction of the special asset purchase program PEPP. Following the results of the last meeting in July, the ECB left unchanged the main parameters of both the RERR (Emergency Asset Purchase Program during a pandemic) and the ARR (main asset purchase program). The PEPP project will be implemented at least until March 2022. Until then, the APP volume will be equal to 20 billion euros per month.

Some experts warn that the RERR will be replaced by an "enhanced" APP program, the volume of which will be significantly increased next spring. If such intentions are announced tomorrow by ECB President Christine Lagarde, the euro will be under the strongest pressure - even if the central bank reduces the volume of asset purchases under the PEPP program from 80 billion euros to 60 per month.

There are also more pessimistic assumptions of analysts. According to a number of experts, the decision on the gradual curtailment of the RERR will be made by the ECB no earlier than October of this year, and not at the September meeting. At the same time, many of them also note the existing risks regarding the implementation of this forecast. According to them, the number of new cases of coronavirus in the EU countries is still growing, and uncertainty about the development of the situation with Covid remains (this is especially true for the autumn-winter period). The downward dynamics of the ZEW and PMI indices reflects the concern of representatives of the business sector about the spread of the "delta". If the epidemiological situation continues to worsen, the ECB is likely to continue buying bonds at the current pace until the end of the year to prevent an undesirable increase in yields. Therefore, a decision on curtailing incentives may also be made at the December meeting.

As for the record growth of inflation in the eurozone, it is necessary to recall that the ECB's new strategy allows for a temporary excess of the target inflation rate, allowing the central bank to ignore such an inflationary surge. This fact, by the way, further postpones the moment of a possible interest rate hike. According to most experts, the ECB will raise the rate no earlier than 2024 (in some reports of currency strategists, the year 2025 also appears).

Thus, the ECB needs to "try hard" to satisfy the requests of the EUR/USD bulls. In my opinion, a significant increase in the pair is possible only if Lagarde repeats the rhetoric of the head of the Central Bank of Austria Robert Holzmann, who said yesterday that the ECB could tighten policy "much earlier than many expect, as inflationary pressures may be more stable ". However, given Lagarde's previous statements, the likelihood of such a scenario is extremely small. The ECB is likely to fall short of EUR/USD bulls' expectations. The actual uncorrelation between the positions of the Fed and the ECB in any case will not go anywhere and will continue to exert background pressure on the pair in the future.

analytics6138dd18a4945.jpg

All this suggests that the pair's upward bursts can still be used to open short positions with the first target at 1.1780 (the middle Bollinger Bands line, which coincides with the Kijun-sen line on D1). If we talk about long-term prospects, then the main target (support level) for the pair is 1.1650 - this is the lower line of the Bollinger Bands indicator on the same timeframe.

The material has been provided by InstaForex Company - www.instaforex.com

Pages