We’ve seen it before – where central banks are dovish and the currency rallies or vice versa. How EUR/USD reacts to the ECB is a function of market expectations. Going into this week’s rate decision, investors expect the central bank to confirm that its change from a “below but close to 2%” to a “symmetric 2%” inflation target that means it may be more relaxed about consumer price growth above 2%. In June, EZ CPI dropped to 1.9% from 2%. At first glance it appears that it has put itself near the end of the line for tightening, but if ECB President Christine Lagarde suggests otherwise on Thursday, EUR/USD could soar.
While Eurozone data has been mixed, the recovery should be gaining momentum. Many European nations eased restrictions and are welcoming back tourists. Confidence is at its highest level in more than two decades, according to the European Commission’s sentiment index, with economic activity bolstered by reopenings for restaurants, shops and other services. Should the ECB express any degree of optimism, EUR/USD could rally on the mere hope that taper is still on the table despite the inflation change. If Lagarde takes this one step further and says the central bank has begun to talk about the possibility of reducing asset purchases, EUR/USD could verticalize towards 1.19. The point is that considering how much EUR/USD has fallen, it may not take much for EUR/USD to rally on ECB Thursday.
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