October 27, 2021 13:12:19

Among a phalanx of central bank meetings this week, the ECB gather tomorrow with no policy changes forecast. Since the last meeting in September, global energy prices have surged, adding upside risks to the inflation outlook. At present, markets are pricing most of a 10bps rate rise by next summer.

President Lagarde is widely expected to push back on this pricing for rate hikes, in line with recent comments from the ECB’s chief economist Lane. Expect to hear talk about base effects, transitory drivers and slack. That said, the battle between the ECB hawks and doves is raging at present. This means Lagarde will probably have to steer a balanced course, keeping options open until a full review and staff forecasts are revealed in December.

This continued cautious stance comes in contrast to other more hawkish central banks and should remain a drag on the EUR going forward. The single currency has been one of the worst performers in the G10 this month as the region, a net energy importer, is suffering a negative income shock from higher energy prices.

EUR/USD rangebound above cycle lows

Technically, the descending channel from the September high at 1.1909 looked to have been broken recently. Previous support/resistance around 1.16 was also pierced.

But the EUR’s failure to break above the August low at 1.1665 on a number of occasions last week points to obvious bearish pressure. Prices appear stuck in a 1.16-1.1665 range at present.

The ECB will have to upgrade its inflation forecasts which will cause some consternation at the inherently dovish central bank. If President Lagarde does spring an unlikely hawkish surprise, EUR will find a bid.

Initial resistance above the 1.1665 area next comes in around the 1.17 zone. The 50-day simple moving average sits here as well as trendline resistance from the June high at 1.1708. An uber-dovish ECB sees bears aiming for a decisive break below 1.16. The cycle low from mid-October sits at 1.1524.