ECB meeting preview: could the ECB strategy bring a less hawkish stance going forward?

ECB meeting: the basics

The forthcoming European Central Bank (ECB) meeting will take place on Thursday 22 July 2021. The initial monetary policy decision will be announced at 12.45pm (London time), with the press conference getting underway at 1.30pm.

Rise of Delta variant reiterates need for supportive ECB

The eurozone economic recovery remains on somewhat unstable ground despite improved vaccination efforts, with the rise in the Covid-19 Delta variant understandably raising questions around just how effective that protection will be.

Nonetheless, the well publicised gap between vaccination rates in mainland Europe and the likes of the UK and US has been largely eroded. In fact, the slowdown in US efforts has seen the EU overtake them in relation to first jabs.

From an economic standpoint, things are taking a turn for the better. While the latest purchasing managers’ index (PMI) figures are released on Friday, the June report saw a record high manufacturing reading of 63.4, while services grew at the fastest rate in over 14 years. Those readings helped to drive a 15-year high composite PMI reading.

However, perhaps the most important economic datapoint from a Central Bank perspective is inflation, with the likes of the Federal Reserve (Fed) and Bank of England (BoE) both warning that the current surge in prices could force their hand sooner than previously expected.

Unlike the UK (2.5%) and US (5.4%), eurozone inflation still remains below the 2% mark. At 19.5%, headline eurozone consumer price index (CPI) is backup into levels not seen since 2018. However, this highlights how the pressure on the ECB to act is less evident than elsewhere in the Western world.

Will the new strategy change things?

This coming meeting has become increasingly interesting for markets in the wake of the ECB’s strategy review last week. The coming meeting is likely to provide the opportunity to gain a better understanding of how that strategy impacts ECB thinking going forward.

With the strategy signalling a need to keep inflation at or marginally below the 2% threshold, there will be little need to adjust the dials to shift prices that are largely at the sweet-spot. However, looking at forecasts, the ECB prediction of 1.3% CPI in 2023 signals a potential dovish divergence from the increasingly hawkish tone set by the BoE and Fed.

Furthermore, this could bring a more dovish tone in relation to asset purchases, with a desire to maintain 2% inflation meaning that the bank could use their projections as a basis to maintain a high level of purchases to avoid seeing CPI fall back.

It seems unlikely that the bank will raise asset purchases given the June indications of potential tapering ahead. However, the degree to which the bank will allow prices to diverge from their target will be important in informing future actions.

While the timing of any tapering will be a key topic of concern, rates are largely predicted to remain static once again this month.

EUR/USD downtrend continues as we head towards key support

EUR/USD has been on the back foot over the course of June and July, with price falling back into a three-month low.

That trend remains in play from an intraday perspective, with the four-hour chart signalling a break below $1.1772 following a 61.8% Fibonacci retracement. That ongoing downtrend means that further weakness looks likely from here, with a rise through $1.185 required to negate this bearish view.

However, from a wider perspective, the daily chart highlights how we are approaching a crucial historical support level. That $1.1704 level was established in late March, with a break below that point signalling an end to the long-term trend of higher lows.

However, it would also complete the right shoulder of a head and shoulder formation. With that in mind, the ongoing downtrend seen of late runs the risk of providing a major bearish reversal signal for EUR/USD.

Given the potential dovish divergence that could grow between the ECB and Fed, this is a significant market for traders to follow in a bid to ascertain the direction of travel for the coming weeks and months.