27.10.202110:25 Forex Analysis & Reviews: Will the ECB surprise the market with its monetary policy decision?

The European Central Bank will hold a monetary policy meeting on Thursday, and so, market participants begin to turn their attention to this important event.

If earlier, investors believed that the European regulator's October meeting would most likely be a "check-through", that fateful decisions would not be made at it, then recent events related to the increase in inflationary pressure in the region and the slowdown in economic growth may still prompt the bank to signal to the markets about a change in the monetary rate next year.

But recently, the ECB did everything to prevent a wave in the markets, despite inflation rising above the key level of 2.0% to 3.4%. However, the continuation of the trend of rising energy prices may force the regulator to reconsider its baseline scenario and follow the Fed to smoothly change the course of monetary policy by reducing the volume of stimulus measures. So far, ECB Chairman C. Lagarde continues to assert in her comments that the increase in inflation is local, probably hinting that there are no reasons to curtail support measures yet, but the Fed's determination in this matter may force it and the Central Bank to reconsider their monetary policy course. This probability is extremely high due to the similarity of problems both in America and in Europe and the ECB's almost 100% adherence to monetary policy following the Fed rate, which is expected to announce the timing of the start of the QE reduction process and its volumes.

That is why there are high grounds to believe that if current interest rates remain at the press conference, Lagarde may make it clear that the ECB may follow the Fed's actions with some time lag, first by reducing measures to support the region's economy, and then begin a cycle of interest rate increases.

How will the euro react to such a scenario?

If the events on Thursday develop according to this scenario, then the euro can definitely get support against all major currencies. The euro, paired with the dollar, may return to the level of 1.1700. But when paired with the pound, the euro may rise to the level of 0.8500.

Forecast of the day:

The EUR/USD pair is trading below the level of 1.1615. Its breakdown may stimulate it to further local growth, first to the level of 1.1665, and then to 1.1700.

The EUR/GBP pair found support at the level of 0.8420. The result of the ECB meeting, which is positive for the euro, may allow the pair to rise to the level of 0.8500.