ECB meeting preview: Lagarde unlikely to act after busy December

When and where?

The forthcoming European Central Bank (ECB) meeting will take place on Thursday 21 January. The initial monetary policy decision will be announced at 12.45pm (London time), with the press conference getting underway at 1.30pm.

ECB unlikely to adjust the dials this time around

The forthcoming ECB meeting looks unlikely to provide too much by way of tangible adjustments to the current monetary policy set. Last month saw a relatively busy meeting for the committee, with Lagarde leading a €500 billion increase the to the pandemic emergency purchase programme (PEPP). That took it to a total of €1.85 trillion.

From a traditional sense, the ECB left all three main rates steady as expected. This time around we see little reason for a shift to the current policy framework, especially given the actions taken in December. Nevertheless, the downside risks are evident for the region, with new Covid-19 strains and rising cases ensuring heightened economic restrictions for the region.

Vaccination efforts remain an underlying reason for medium-term optimism, yet the drawn-out nature of that programme ensures the first half of 2021 will undoubtably see significant economic challenges for the region.

Nevertheless, with ECB economic projections already presuming restrictions until the end of the first quarter, the question really is whether the new strains play enough of a role to shift lockdown expectations significantly.

EUR/USD declines allay expectations of FX commentary

Much has been made of the euro strength seen over the course of 2020, with markets hoping to see ECB President Christine Lagarde take on Mario Draghi’s role or chief jawboner. However, while Draghi showed a talent for talking down the euro at every chance, Lagarde appears less concerned with such activities.

It is worthwhile watching for any commentary over the elevated nature of the euro, yet it is unlikely we will see any specific actions taken by the committee in a bid to target the single currency.

The daily chart highlights the recent pullback into key support at $1.2059. The wider uptrend remains in tact despite recent downside, with the recent weakness likely to form a temporary retracement.

With that in mind, the question is just how deep is this retracement going to be.

For now, the $1.2011 to $1.2059 zone is hold, with a break below that point required to bring about a wider retracement signal. To the upside, a break through $1.2223 would be required to bring about a fresh bullish continuation signal and end the recent pullback.