ECB Policy Review Concluded
As part of new ECB president Christina Lagarde’s first big moves as ECB chief, the former IMF-head ordered a review of the bank’s monetary policy. This is the first such review since 2003 and the conclusion of the undertaking led to the ECB announcing this week that it will shift its inflation target higher to a hard 2% from the prior target of “close to, but below, 2%”. The review established that such a target was too vague and hinted that the ECB had intentions of capping prices from hitting the 2% level.
Symmetrical Inflation Risks
The report outlines that the ECB’s new firm target of 2% is symmetrical, “meaning negative and positive deviation from the target are equally undesirable”. While on the face of it, the change might seem fairly unimportant, the adjustment actually represents a significant shift in the bank’s monetary policy targeting.
Announcing the new change, the ECB explained the benefits of lifting its inflation target. The report said: “When the economy is operating close to the lower bound on nominal interest rates, it requires especially forceful or persistent monetary policy action to avoid negative deviations from the inflation target becoming entrenched.” The ECB went on to explain that “This may also imply a transitory period in which inflation is moderately above target.”
Inflation to Be Allowed to Run Hotter
The upward adjustment means that the ECB is now prepared to allow inflation to run a little higher than previously before needing to adjust rates. In essence this can be thought of as structurally dovish in that, the bar for raising rates has now been lifted. However, it can also be interpreted as an indication of the ECB’s view on the current trajectory of the economic recovery and its own projections for inflation over the near term.
Market Awaiting Policy Clues
With inflation expectations rising and vaccination progress growing, the market is keenly awaiting a signal on ECB tapering. However, the review gave no mention of the bank’s asset purchase program and so for now, traders are still left in the dark over tapering. Given what the upward revision to the bank’s inflation target likely implies about its inflation forecasts, however, they might not need to wait too much longer to find out.
Technical Views
EURUSD
The latest push below the 1.1840 level has been accompanied by strong bullish divergence on both MACD and RSI. While below the level, the focus is on a continued push lower towards the 1.1703 level next. Above there, however, and the focus will be on the 1.1961 level, with the bearish trend line in the region also. Bulls will need to see a break of this level to affect a change in sentiment.
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