ECB Strategy Review - What to expect

Christian Lagarde has informed the market that the results of the strategy review will be announced at 12pm UK time/9pm Australian time during a press conference. The main result arising from this meeting will be with regards to the ECB’s inflation mandate. Some are in favour of an approach similar to the Fed’s Average Inflation Targeting (AIT), while others are more reticent given it would be quite a dramatic shift from current policy. This is ironic given how structurally weak inflation in Europe has been. Currently, the asymmetric inflation target means that the ECB only intervene if the 2% rate is exceeded, and not when it falls below target (built-in deflationary bias). By removing the word, "below," the ECB would send a signal to the market that they’ve switched to a symmetric inflation target regime.

Markets have most likely priced this scenario so the euro shouldn’t flinch at the announcement. Where an upside surprise for the euro could occur would be leaving the current inflation target as is, while the euro could come under pressure in the less likely event the ECB shift to AIT. We could also see a change to the formula of how inflation is calculated. If the ECB opts to incorporate housing in its new inflation metric, it could make inflation readings more punchy. That could mean less stimulative policy settings as a result and see more aggressive tapering and potential rate hikes – bullish for the euro. There is also chatter about expanding their mandate to include other goals such as employment. This would be a dovish surprise for currency traders as allowing the labour market to run hotter would mean “lower for longer”.

Technically, EURUSD keeps getting offered into rallies to the upside. While the price candles remain below the 21-day EMA. The 50-day SMA is also now pointing South and could if it continues on its current direction of travel cross below the 200-day SMA (death cross). Price for the meantime has held the 1.18 support and is capped on the upside by the 1.19 resistance – mini range. Below the range support, some stops would most likely get triggered bringing the 1.17 March 31 lows into view. A deeper selloff could bring the September and October double bottom into play around 1.16. The RSI is in oversold territory, so a hawkish surprise could see a bit of an oversold bounce back up to range resistance around 1.19.