It has been a very quiet day for the euro. In North American trade, EUR/USD is trading at 1.1772, up 0.01% on the day.
ECB changes forward guidance
On Thursday, the ECB met for the first time since releasing its strategy review. The markets were buzzing ahead of the policy meeting, as ECB President Christine Lagarde had telegraphed to the markets that the central bank would align its forward guidance with the review.
As promised by Lagarde, the ECB did shift the language in its forward guidance. The new inflation target was revised upwards to 2%, compared to the previous “below, but close to 2%”. The second change was more controversial. The previous guidance stated that the Bank would maintain current interest rates until it was satisfied that inflation was approaching the target. The new guidance states that the ECB will not raise rates until inflation reaches the 2% target “well ahead of its projection horizon and durably” – clearly, this new language is more dovish. Some members objected to this language, but in the end, Lagarde won the day.
These changes to the forward guidance are significant because the ECB’s stance has become that much more dovish. The ECB is not showing any intent to taper QE and is not concerned about very low levels of inflation. This stance could have soured investors and sent the euro lower, but it seems that the markets priced in this dovish position and the euro’s reaction was muted.
With interest rate hikes now less likely than before the meeting, the euro will find itself under even more pressure. The euro was basking above 1.22 at the beginning of June, and the prolonged downturn could well continue.
German and eurozone PMIs continued to impress in July, with readings above the 60-level. This indicates strong expansion in the manufacturing and services sectors, both of which are critical drivers of economic growth. German Manufacturing PMI was particularly sharp with a read of 65.6, up from 65.1 points.
- On the downside, 1.1759 remains under pressure. Below, there is support at 1.1711
- There is resistance at 1.1867 and 1.1927
Written by Admin
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