ECB Preview Central Bank In Wait and See Mode

The ECB is due to give its first policy decision of 2021 on Thursday 21st January at 12:45pm, followed by a press conference at 13:30pm.

No action expected

The ECB are not expected to adjust monetary policy at this meeting, with all the big policy decisions having been taken at the last meeting. In December the ECB increased its Pandemic Emergency Asset Purchase Programme from €1.35 trillion to €1.85 trillion in addition to extending it for a further 9 months, until March 2022.

Since the last meeting manufacturing in the bloc is holding up well. However, the services PMI remains well in contraction with little prospects of picking up for now amid continued lockdown restrictions in the largest economies, Germany and France. Inflation is also lack luster -0.3% year on year on December.

Short term risk vs medium term growing optimism

Short term risk has turned even further to the downside with higher covid cases and tighter lockdown restrictions. The vaccine rollout is also taking longer than initially hoped.

The ECB economic projections assume lockdown restrictions until the end of March. However, with covid cases and deaths rising and several countries in the block extending lockdown restrictions this assumption could be too optimistic.

Meanwhile Brexit and prospects of additional US stimulus are positive drivers. Furthermore, as the vaccine rollout accelerates and as the weather improves covid cases are expected to lower and economic activity pick up. With this in mind, the ECB could in fact adopt a fairly upbeat tone focusing more on the upbeat medium term developments rather than the near term short term risks.

Euro strength

The strength of the Euro has been in focus over recent weeks and we already know that the ECB is monitoring the exchange rate. Its worth watching out for any comments over the Euro’s elevated value. However, its unlikely that the ECB will take any action.

EUR/USD analysis

The EUR/USD is under pressure around 1.21 after rising to an intra session high of 1.2158 and bouncing off resistance of the descending trendline and falling back through the 50 sma on the 4 hour chart. Although the broader up trend seen on the daily chart remains in tact.

The pair currently trades at 1.21 testing the 20 sma on the 4 hour chart. A break through here could see the 1.2060 critical support tested prior to 1.20.
On the upside a move above 1.2160 the descending trendline resistance could pave the way to 1.2220.

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