ECB Doves to avoid Taper talk

Today the ECB is meeting to discuss monetary policy for the Euro Zone, we don’t expect any policy changes today, but the ECB will update their economic forecasts. Which should paint a picture of recovery going forward.

The EZ is getting over the effects of economic shutdowns like everyone else. Although the EU suffered initially from a poor vaccination program, they are playing catch up. The data recently has been ok, but not as good as was expected. So I think that the doves in the ECB may well carry the day and will not mention tapering for some time.

I expect the ECB meeting and press conference to be mildly supportive for the EUR.
However, at the same time as ECB President Christine Lagarde takes to the stage for her press conference, the US will release its CPI data for May. We are expecting headline CPI to be 0.4% MoM and 4.7% YoY, with core inflation coming in at 3.5% YoY.

Even though the Federal Reserve is meeting next week, we know they keep saying inflation is just a temporary transition. So the CPI number is not going to have any impact or change this view. The reaction to today’s inflation data from the Fed won’t be know until after next week FOMC, as the board members are not allowed to speak.

I think that an even small upside surprise to CPI will get the US Dollar moving higher. Today will also have the release of weekly jobless claims which is forecast to show an improving labour market, this is also likely to be US Dollar supportive.

There are now lots of people in the market questioning the policy of the Federal Reserve. Who they think have underestimated the inflation risk. I believe that the Jackson Hole symposium could be the tipping point for the Fed to change direction and signal its intention to taper later this year.

The EURUSD has spent the past 3 post NFP days biding its time, with little conviction from traders to drive the EUR in either direction, yesterday it did make a brief attempt to rally above 1.2200. However daily resistance at 1.2210 soon put a stop to that. More resistance will be found at 1.2240/60 and 1.2310 should the ECB spring a surprise or if the data disappoints.

Immediate support for the EURUSD will be found first at 1.2150/40 and then 1.2110/1.2090. For me the key area for support is at 1.2060 a sustained break will indicate a more bearish sentiment for the EUR in the short term at least.