21.07.202110:19 Forex Analysis & Reviews: Euro declines ahead of ECB policy meeting

Euro declined ahead of the ECB meeting on Thursday. Pound, on the other hand, continued to fall amid confusion within the UK government over whether self-isolation is still needed or not.

So far, many are curious how the new inflation target of the European Central Bank will affect the markets and the monetary policy. Nobody expects that the meeting this July will be of great importance, but the decisions during it will be decisive for the policy.

Last July 8, the central bank said it will set an inflation target of 2.0%, replacing its previous goal of below or about 2.0%. Immediately after that, bond yields in the Euro area collapsed, as investors expect a long-term strong monetary stimulus. The ECB will explain during its meeting tomorrow how they will achieve this target, detailing what instruments it will use.

This move is clearly different from the actions of other central banks, such as the US Federal Reserve. Most are already considering scaling back bond purchases and increasing interest rates. At a minimum, the forecasts of these banks will change exactly in September this year.

But for the ECB, it seems that they will continue a soft policy until the coronavirus pandemic ends. This is bad news for investors who are counting on a more aggressive approach, not to mention it could harm the position of the European currency in the market.

Some analysts also believe that setting a higher inflation target without stimulating support programs will do little to achieve the new goal. Just recently, ECB President Christine Lagarde said the central bank is planning to end some of their programs right after scaling back the volume of bond purchases. More details will be revealed at tomorrow's press conference.

Even so, key interest rates will remain at or below current levels until inflation reaches the target level. Many are predicting that this will happen by 2023.

In the United States, a report on housing starts was released yesterday, which indicated that another increase was observed in June, thanks to rising materials and labor costs. The Department of Commerce said the index was up 6.3%, reaching a value of 1.643 million. As for the number of issued permits, a 5.1% decrease was recorded, so the index fell to 1.598 million.

But all in all, there was a sharp increase in housing demand caused by the easing of quarantine measures implemented during the COVID-19 pandemic. Consumer demand also rose even though prices are hiking because of an acute shortage of stocks and high production costs.

With regards to EUR / USD, pressure persists on the pair, so a lot will depend on 1.1825 because dropping below it will result in a further decline to 1.1757, 1.1740 and 1.1715. But if the quote consolidates above 1.1801, EUR / USD will climb to 1.1825.

GBP

Pound continued to decrease in price amid growing coronavirus infections in UK. Uncertainty within the UK government regarding the reimplementation of quarantine measures also added pressure to the currency.

Another outbreak threatens the current economic recovery, but UK Ministers Paul Scully and Gerry Grimston stressed that the government's decision to lift all quarantine measures meant that the public could ignore orders to self-isolate at home. Even so, Prime Minister Boris Johnson said he is determined to keep the economy completely open, despite the recent sharp rise in coronavirus infections.

In another note, a report on UK house prices was released yesterday, which indicated that property prices rose 13.4% last month compared to June 2020. This is the most significant growth since 2004. Average prices also increased to nearly £ 250,000, which is equivalent to $ 344,200.

Going back to GBP/USD, a lot depends on 1.3605 and 1.3640 because going above it will lead to a jump towards 1.3675 and 1.3720. But if the quote drops again below 1.3905, the pair will plunge to 1.3575, 1.3531 and 1.3480.