The New ECB Monetary Policy Strategy and the EURUSD

The ECB Changes Monetary Policy Strategy to Symmetric Target

On 8 July the ECB announced its new monetary policy strategy of symmetric 2% inflation over the medium term. The target is symmetric in that any deviation, be it positive or negative, is regarded as "equally undesirable." Market participants were eager to learn more and there was a keen focus on the ECB statement and President's Lagarde's press conference on 22 July to see what would be heralded in under the new regime.

However, on its release, the statement (monetary policy account) wasn't very different from previous communications, which has disappointed some of the market. Nevertheless, the new policy does align interest rates more closely with inflation. The key seemingly to be that intertest rates will not move up (but may move lower) until the symmetric 2% level is achieved. Of note, mention was made of "a transitory period in which inflation is moderately above target." In other words, the central bank is now acknowledging the possibility of an overshoot under its new policy.

Governing Council Fractured

The ECB is generally fractured and this monetary policy account's wording was a focal point. The statement's sentiments were not unanimous amongst the Governing Council's members. Reuter's reports that the ECB meeting was "an unusually robust debate, and a lot more than just two people voiced concerns, but most were eventually won over by Lagarde." Jens Weidmann of the Bundesbank and Pierre Wunsch, the governor of Belgian's central bank, are reported to have dissented. On CNBC, Wunsch stated that he is reluctant to commit to a 5–6-year dovish policy but did agree "that what [the ECB has] been doing in the last few years was necessary and proportional."

Dovishness Persists

The central bank reported that it is expecting transitional inflation which will then decline into 2022 and 2023. Given the alignment of interest rate policy to inflation as per the new monetary policy strategy, an extension of its emergency pandemic programme beyond Q1 of 2022 is likely, whilst a reduction in its asset purchase by year-end 2021 is unlikely.

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Given that the status quo continues at the ECB, it is of no surprise that the trend in the EURUSD remains down. The moving averages (MA) are still lined up bearishly with the green MA < orange MA < red MA, with angle and separation. The blue arrow indicates the day of the statement release and the press conference. Besides a slight tick up to the orange moving average before reverting to trend, the currency pair has not changed trajectory.

Conclusion - The EURUSD Downtrend May Help Foster Inflation

If the EURUSD continues to devalue, imports into Europe will be more expensive. Thus, a lower currency pair will help import inflation into the Eurozone, especially if the imports are necessities. In this regard and according to Eurostat, computers, electronic and optical products and crude are the most imported products (each 13% of imports), with chemical & chemical products coming in at 7% of imports. If these percentages maintain, this may help the ECB in its efforts to achieve its new symmetric target of 2% inflation.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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