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ECB minutes and Christine Lagarde’s dovish stance

The minutes of the ECB and the complacent position of Christine Lagarde

Recent and projected near-term inflation is fueled by temporary factors that are expected to ease over the course of 2022. Minutes released at the December ECB meeting confirmed the dovishness that some ECB members have been boasting for a few days: recent and projected inflation in the short term is fueled by temporary factors that should subside in the course of 2022.

As recently as Thursday, European Central Bank President Christine Lagarde echoed those comments, showing that even with an EU CPI at 5%, she still remains dovish.

Lagarde went on to say that the ECB had “every reason not to react as quickly” as the Fed. Similar comments were made this week by the ECB’s Villeroy, who said inflation should fall back below 2% by the end of the year.

Recall from the December ECB meeting that although the ECB will end its Pandemic Emergency Purchase Program (PEPP) in March, it will continue to buy bonds under the Pandemic Emergency Purchase Program (PEPP). purchase of assets (APP) at a rate of 40 billion euros in the second quarter and 30 billion euros in the third quarter, before returning to the current level of maintenance of 20 billion euros. Members also said they see inflation above their 2% target for most of 2022 and only see inflation of 1.8% for 2023 and 2024.

What does this mean for the euro against a forex currency, like the pound sterling, whose central bank is raising rates? Typically, this means the Euro will go down. Indeed, EUR/GBP has been in a long-term descending channel since April 2021. However, in August 2021, the pair became more volatile and started trading either side of the channel, creating an even wider channel (green). On Thursday, after Christine Lagarde’s comments and ECB minutes, the EUR/GBP pair broke out of the biggest channel to its lowest level since February 2020!

EUR/GBP daily chart

Source: Tradingview, Stone X

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On the 4-hour chart, we can see that the price has not only broken below the lower trendline of the channel, but also below the 127.2% Fibonacci extension from the lows of November 19, 2021 to the highs. from December 8, 2021, close to 0.8321. The first support is seen at the confluence of the February 2020 and December 2019 lows near 0.8282 and 0.8276 respectively. Beneath this is the 161.8% Fibonacci extension of the previously mentioned timeframe near 0.8244.

However, note that the RSI diverges with the price, an indication that the pair EUR/GBP may be ready to rebound in the forex. Horizontal resistance is at 0.8336, then the previous support level at 0.8380. Above, previous support is once again resistance at 0.8416.

EUR/GBP 4 hour chart

EUR/GBP Christine Lagarde 20012022
Source: Tradingview, Stone X

While the European Central Bank remains dovish, the Bank of England is hawkish. Markets have fully priced in a rate hike for the Feb. 3 meeting. If this momentum continues, there could be more downside in the forex for the EUR/GBP pair in the near term.

By Joe Perry, CMT, Forex.com » Official Site

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Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or solicitation to buy or sell forex exchange contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages which may result from the fact that anyone relies on such information.



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