Today's trading session is crucial for the euro's performance against the rest of the other major currencies, as the European Central Bank will announce its monetary policy decisions. Amid strong expectations that the bank will maintain interest rates, the strongest focus will be on the tone of the bank's policy statement and the statements of the bank's governor, Christine Lagarde. Ahead of this event, the EUR/USD is still under downward pressure, stable below the 1.1600 support level. The euro's decline against the dollar during the September period was halted in part by a marked shift in market expectations regarding the future of interest rates in the Eurozone.
The assumption has long been that ECB interest rates will only rise in 2024, at the earliest, given the bloc's slow inflation rates. But inflation is now rising sharply, driven in large part by ongoing supply chain issues and rising energy prices. This prompted the market to reassess the outlook for Eurozone policy by presenting the future forecast for the first rate hike in 2022.
This expectation was supported by rapid re-pricing of rate hike expectations at other central banks, including the Bank of England and the US Federal Reserve. Increased price expectations lead to a tightening of monetary conditions, i.e. the cost of financing rises and creates headwinds for economic growth in the Eurozone.
This was why there could be a strong disagreement among ECB policymakers: some on the ECB's Governing Council agree that some of this is justified given high (hawkish) inflation, but others that costs should be kept low by any means (doves).
On the outlook front, Francesco Pesol, Forex analyst at ING Bank, says current market expectations of an ECB rate hike as early as 2022 will be resisted by ECB President Christine Lagarde, although she will have to negotiate carefully with the various factions on the ECB Governing Council. .
"We believe ECB President Lagarde will use all her diplomatic skills to mitigate the divergent views of hawks and doves within the Governing Council on Thursday, and the neutral message may ultimately challenge some of the hawkish expectations of the market," he added.
ING has found that the EUR/USD risk balance appears slightly to the downside. The EUR/USD exchange rate has been contained within a narrow range between 1.1530 and 1.1670 since September and investors are wondering if today's policy decision will be enough to inject some volatility into the pair.
Technical Analysis
There is no change in my technical view of the EUR/USD currency pair, as the general trend is still bearish. Stability below the 1.1600 support will allow a move towards stronger support levels, the closest of which are 1.1555 and 1.1480. The last level will push the indicators to strong oversold levels. On the upside, there will be no opportunity to correct upwards without breaching the 1.2000 psychological resistance. Otherwise, the general trend of the EUR/USD will remain bearish.
The pair will react to the European Central Bank's announcement of its monetary policy decisions and the statements of Governor Lagarde, as well as the announcement of the US GDP growth rate and the number of US weekly jobless claims.
