Dovish Shift in Tone

At the ECB’s October monetary policy review held yesterday, the bank held its headline policy operations at current level, in line with expectations. With no adjustments expected at this point, the main focus was on the guidance offered by the bank. The market was looking for the bank to reaffirm its commitment to easing in December, which it did. However, the tone of the meeting was slightly more dovish than the market had been expecting with ECB governor Lagarde advising that the banks governing council will be considering all policy options when it adjusts its policy in December.

The statement issued alongside yesterday’s monetary policy decision said: “The new round of Euro-system staff macroeconomic projections in December will allow a thorough reassessment of the economic outlook and the balance of risks. On the basis of this updated assessment, the Governing Council will recalibrate its instruments, as appropriate, to respond to the unfolding situation.”

Resurgent COVID Presents Clear Threat

Lagarde was clear in warning that the resurgence in COVID-19 in the eurozone had come at a quicker pace than they had forecast and presents a “clear risk” to the economic outlook for the single currency bloc. Adding to the dovish tone of the meeting, the ECB’s chief economist Phillip Lane, who presents policy proposals, warned that unless the spread of the virus can be controlled soon, the bank will prepare itself for worst case scenarios.

Over recent days both France and Germany have been plunged back into one-month lockdowns with Italy and Spain both on the brink of fresh, nationwide lockdowns also. These new lockdowns make the situation even more difficult for the ECB given that many data sets were showing the recovery had already stalled ahead of any measures being announced. In light of the risk of further countries in the eurozone heading back into lockdown ahead of the December meeting, downside risks are growing for the ECB and easing expectations are rising.

Technical Views

EURUSD

From a technical viewpoint. EURUSD continues to move lower within the corrective bearish channel which has formed over the last two months. While still above the 1.1611 level support, the structure can be viewed as a bull-flag, suggesting an eventual break higher in the medium term.

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