ECB meeting preview: euro appreciation could drive dovish shift

When is the ECB meeting and where is it?

The forthcoming European Central Bank (ECB) meeting will take place on Thursday 10 September.

Will the euro appreciation encourage the ECB to act?

The recent Federal Reserve (Fed) meeting saw Chair of the Fed Jerome Powell and company shift the goalposts as a move towards an average inflation target signalled the potential for a more protracted period of easing, uninterrupted by any potential spike in inflation. That move from the Fed does seem to put the ball into the ECB’s court, with recent euro appreciation worries likely to persist in the absence of any dovish tone or actions.

The ECB have let it be known that continued gains for the euro would likely come to the detriment of businesses, thus driving up the need for extended easing from the bank. With August inflation coming in at an unimpressive -0.2%, comments from ECB Chief economist Philip Lane that the committee does consider a strong euro in their decision-making does point towards a potential shift in tone going on Thursday. Given the recent rise in coronavirus cases in Europe, coupled with falling inflation, there is a good chance the ECB will start laying the ground for further easing in December.

ECB forecasts due to be updated

Alongside the usual releases, this month we will see the committee provide their latest economic forecasts. Given the somewhat shocking consumer price index (CPI) reading in August, an adjustment to the already lowly 0.3% projection for headline CPI in 2020 will be notable as potential gauge of how long this environment of loose monetary policy will last.

Where now for the euro?

EUR/USD has been in consolidation move over the course of the past month, with the first week of September seeing the pair move lower from trendline resistance. The descending standard deviation channel seen on the monthly chart below highlights the wider bearish trend in play for the pair, which the ECB will hope to bring back into play once more.

From a daily perspective, we can see an ascending channel in play once again, with the price dropping back into the lower echelons of that two-standard deviation channel ahead of the ECB meeting. The key here is to continue on the pathway of higher lows, with a breakdown below $1.1754 providing an end to this bullish trend.

As such, there is still a chance of a rebound from here, but a breakdown below that late-August low of $1.1754 would signal the potential for a bearish phase as the long-term trend kicks back in once more.