ECB Up Next

Ahead of the July ECB meeting today, market expectations are firmly anchored to the downside. Following the conclusion of the strategic review of monetary policy ordered by Lagarde, the ECB announced earlier this month that it will now be raising its inflation target to a hard level of 2%. Previously, the inflation target had been set at close to 2%, meaning the market might reasonably expect the bank to tighten from around 1.75% and up. However, with this subtle shift, the ECB has effectively raised the bar for the level of inflation which will incur a tightening of monetary policy. The read is: rates will remain lower for longer.

ECB To Drive Home The Dovishness?

Today’s meeting then is widely expected to see Lagarde and Co doubling down on the dovish message. Similar to the Fed, the ECB has been steadfast in its insistence that it is not yet anywhere close to tapering. While others in the G10 camp have begun tightening policy and others look close to, the ECB has been adamant in delivering its message that policy will remain at current levels for the foreseeable while it monitors the residual risks around the pandemic.

Focus on Inflation & Outlook

Indeed, at the bank’s latest meeting, the ECB outlined that while it expects inflation to rise above target this year, hitting 2.5% by year end, it firmly expects this spike to be transitory and will not require a shift in policy. This took some of the bite out of the 1.9% June CPI reading delivered last week. If the bank is seen reiterating this message and downplaying upside risks in the economy, focusing on the residual risks around COVID instead, this should keep EUR weighted to the downside. With this in mind, the bank is also expected to announce an extension of current measures, keeping its PEPP in place for longer.

Expectations Are Key

However, given the built up level of dovish expectation in the market on the back of the inflation target being lifted, there is room for the ECB to disappoint bears. If the ECB refrains from extending the PEPP duration, or sounds more upbeat about the economy, any altered view on inflation, this could see EUR short positioning unwound sharply.

Technical Views


EURUSD continues to trade with the falling wedge pattern on approach to the double bottom at 1.1703. With plenty of bullish divergence in both RSI and MACD, there is room for the pair to break higher on any disappointment for doves today. A break above the wedge and above the 1.1840 level will target the 1.1961 level initially, with 1.2071 the next level thereafter.