The highlight of economic calendar this week was crucial ECB policy meeting that was held on Thursday. The regulator provided more details on strategic review of its policy and refined its definition of inflation targeting; however, implications of the meeting were bearish – the ECB communication was largely seen as a signal that asset purchases will likely continue longer than expected while rates would remain low for another 5-6 years.

Unlike the Fed, which is trying to figure out how long the increased inflation will last, the ECB expects a very modest rise in consumer prices, on average 1.4% until 2024. This is well below the 2% target and implies the need to maintain stimulus, making it completely irrelevant to talk about tightening policy. The rate guidance reflected the expectation of weak inflation with the wording that the interest rate will remain at or below the current level until the ECB sees that inflation has reached the target level with sufficient time until the end of the forecast horizon and that it can be durable at this level, and that the progress in inflation is sufficient to stabilize at 2% in the medium term. During this period, according to the ECB, inflation may be moderately above the target of 2% for some time, but this should not impact rate-setting ECB decisions. In general, the wording is quite bearish which suggests that no rate hikes should be expected in the next few years under any circumstances.

Long-term German bunds came under pressure, as the ECB, in fact, declared a higher tolerance of its policy to accelerating inflation, i.e., inflation premium in long-term instruments should likely start to rise again. The European currency, following the fake breakout above 1.18, returned to the narrowing range, in which it has been stuck since the end of June:

The upward breakout at the ECB turned out to be fake, as the ECB did not make the slightest hint of the earlier curtailment of stimulus measures, so the focus is shifted to the Fed meeting next week. Inflation in the US in June was noticeably surprising, exceeding forecasts (both the broad indicator and core inflation), but inflationary pressures were concentrated in certain components, for example, in used cars and fuel. Some market participants do not lose hope that the Fed will begin to roll back QE and the lack of consensus in the market on the Fed's rate promises high volatility when a new portion of communication appears next week.

Markets expect the main announcement to be at the Jackson Hole conference in August, so next week's status-quo meeting, without sudden pessimism, should help USD to stick to its recent gains, and possibly even gain further against lower-yielding currencies, mainly GBP, EUR, CHF and JPY. Taking into account the technical situation on EURUSD, a breakdown of the pattern towards the April support (1.17) is a more likely scenario next week.