ECB meeting: High inflation still transitory or time to talk tapering?

When will the ECB announce their interest rate decision?

The ECB will announce its interest rate decision on Thursday at 12:45.

What to expect?

The fourth wave of COVID, the rapid spread of Omicron and partial lockdown restrictions are complicating the outlook for the ECB, ahead of what was expected to be a key meeting.

Recent economic data has been pointing to a slowdown in momentum in the economic recovery whilst rising COVID cases are expected to add yet more pressure. At the same time, inflation keeps rising and may not be as transitory as the central bank originally suspected. The ECB has sounded more dovish than most central banks but rising inflation and COVID are putting the central bank under pressure.

New projections, no major changes

The ECB are expected to provide a new round of projections, although no significant changes are expected. Back in September, the projection for GDP growth was 5% for 2021 and 4.6% for 2022. Inflation was forecast as 2.2% and 1.7%. The ECB has so far sounded confident that inflation will fall back below its 2% target level despite hitting 4.9% in November but will this confidence continue. 

Tapering asset purchases in 2022?

Discussions at the ECB meeting could well focus on the Pandemic Emergency Purchase Programme and its proposed ending in March 2022. There are reports suggestions that the ECB could look to expand the Asset Purchase Programme (APP) a more flexible asset purchase programme as the PEPP is wound down, to avoid a cliff edge ending. However, given surging COVID cases and concerns that the partial lockdown restrictions could hamper result in a soft patch on the road to economic recovery, there is an increasing chance that the ECB could kick the can down the road.

Omicron clouds the outlook

At this stage the ECB are going to want to keep all options open, so the December meeting now looks rather uncertain. While some tapering of asset purchases in 2022 looks like a done deal, that’s a much as we are probably going to get from the ECB. The central bank will most likely want to see how Omicron and any necessary restrictions impact the economy before giving too much away over plans for 2022.

Compared to other central banks such as the Fed of the BoE, the ECB appear happy to sit on the sidelines. The divergence in monetary policy could be a key factor in the slide of EUR/USD.

Where next for the EUR/USD?

EUR/USD has formed at symmetrical triangle pattern, following a bearish move – this points to a bearish continuation pattern.

Therefore, we could expect the break out from the triangle to be to the downside, to test support at 1.1235 and 11.85 the year to date low. The RSI in bearish territory supports the idea of further losses as well.

Resistance can be seen at 1.1375 the November 30 high ahead of 1.1465 the 50 sma.

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