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Euro Continues to Drift ahead of FOMC

The euro is almost unchanged in the Thursday session. In North American trade, EUR/USD is trading at 1.2166, up 0.05% on the day. After a sharp drop on Friday, the pair has been directionless.

All eyes on FOMC

What can we expect from the FOMC meeting on Wednesday? The Fed has been very consistent in its message to the markets that it will continue its ultra-loose policy, but investors will want to hear this yet again, as US inflation has been above the consensus for two straight months. Fed policymakers may feel that the time is ripe to gradually introduce debate around when to begin a taper of QE, or they could opt to breach the topic at another time, perhaps at the Jackson Hole economic forum in August. If the Fed does provide any hints of a tightening in policy, we can expect the US dollar to respond with gains after the policy meeting.

ECB says higher inflation is temporary

The ECB made clear at its meeting last week that it would maintain its ultra-loose monetary policy. The central bank did acknowledge that the eurozone economy was improving, as it revised upwards its growth and GDP forecasts. At the same time, the bank pledged to maintain its bond purchase program.

Inflation has become a hot word for the markets, and there was little surprise as the ECB revised its inflation forecast at the policy meeting. The bank is projecting an inflation rate of 1.9%, considerably higher than the forecast of 1.5% in March. Taking a page out of the Fed’s playbook, ECB President Lagarde attributed the projection of higher inflation to temporary factors. Lagarde went even further, saying inflation remains well below the ECB target. This means that the bank has no intention of tightening policy over concerns of higher inflation. Lagarde’s message snuffed out any possibility of the euro gaining ground due to investors’ concerns over inflation.

EUR/USD Technical

  • On the upside, 1.2245 has held in resistance since June 1. Above, there is resistance at 1.2325
  • There is support at 1.2095, followed by 1.2025
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