19.01.202116:46 Forex Analysis & Reviews: EUR/USD: What to expect from the ECB meeting

Risk buying was again observed on Tuesday which, among other things, was noticeable in the weakening of the Japanese yen in relation to its main competitors - the euro and the dollar. The rise in risk appetite is associated with the market reaction to strong data from China, which is not entirely clear. The data was released on Monday and was greeted by investors rather calmly.

The jump on Tuesday is more like trying to start a buying wave after a slight decline. Investors are buying out risky assets because they believe in the prospects for a global economic recovery. In addition, new incentives from the US are ahead, and long-term preservation of low rates in combination with accelerating inflation is expected.

Markets are trying to hold on to the strong upward impulse that formed in September last year. The technical picture suggests that the "bullish" trend remains on the stock markets, despite the signs of overbought.

The recovery in risk demand contributed to the rebound of the euro. The EUR/USD pair ran into an avalanche of purchases upon touching the 1.2050 mark, and by Tuesday morning, the rate had gone above $1.21

On the side of buyers of the euro and the renewed decline in the dollar. Traders sold off the US dollar ahead of Janet Yellen's speech. The new Treasury Secretary is widely expected to abandon the weak dollar policy.

As before, Yellen will say that the new administration is committed to the market exchange rate. In terms of fiscal policy, it proposes to "act big" and use low borrowing costs. Both of these factors are in line with the current "bearish" forecast for the dollar, which many investment banks continue to adhere to. What is happening to the US currency in recent days, analysts call "insignificant corrective growth in the general downward trend."

This is a positive signal for euro buyers in general. So far, it is difficult to say how investors will react to Yellen's speech. Her words may well fuel the dollar's recent rally, albeit for a short time. Another test for the euro this week will be the ECB meeting.

ECB May cut rate, but not in January

It is unlikely that the issue of policy easing will be brought to the meeting on Thursday, January 21, as the ECB extended quantitative easing at the previous meeting in December. Large investment banks do not expect the upcoming meeting to affect European markets. Christine Lagarde's press conference will likely focus on the economic impact of the resumption of quarantine in Europe and the spread of vaccines. The question of additional incentives in the United States may be put on the agenda, namely, how they will affect the prospects for Europe.

In the future, the regulator may lower interest rates more if the euro rises sharply. Two factors that will complicate a relatively calm life at the ECB are the further rapid rise of the single currency, the euro, and an unexpected increase in inflationary expectations in the financial markets.

Although Central Bank officials are signaling that they are closely monitoring the euro, they are unlikely to tighten their rhetoric towards the national currency after its recent fall.

Some analysts say the euro, given its 1% decline in January, is not strong enough to cause concern in Frankfurt.

"If we get to 1.30, that's another story, but for now they are satisfied with the current situation," writes Pictet Wealth Management.

Most market players perceive the inability of the Central Bank to reduce real rates or bond yields as some kind of signal for further strengthening of the currency. Especially if you consider this in the light of the continuing trend of the dollar's decline.

Investors do not believe that more aggressive easing of ECB policy will significantly affect inflation expectations. The previous rounds, as everyone remembers, did little to this. However, with further growth of the euro, the regulator may again decide to take such a step.