Breakdown of the latest developments on the global exchanges
Jul 8, 2021, 12:08 PM GMT

ECB's New Monetary Policy Strategy Sends EURUSD's Price Action Soaring

ECB's New Monetary Policy Strategy Sends EURUSD's Price Action Soaring

Despite a sizable bullish rebound in the short term, EURUSD's price action continues developing a major downtrend. To get a better sense of the broader market sentiment, check out our last detailed analysis of the currency pair.

The Governing Council of the ECB announced the adoption of a new monetary policy strategy by the bank with regards to inflation. The announcement sent the EURUSD soaring during today's trading session as the price stability outlook in the Eurozone is evidently improved.

ECB's New Monetary Policy Strategy Sends EURUSD's Price Action Soaring. THe EURUSD is establishing a temporary bullish pullback in a broader downtrend

The existence of a robust downtrend is elucidated by the recent breakdown below an Ascending Wedge pattern, as shown on the 2H chart above. However, ECB's decision caused a sizable bullish rebound from the dip of the downtrend.

The resurgence of bullish momentum is underpinned by the MACD indicator, which recorded a bullish crossover between the 12-day EMA and the 26-day EMA. This is further demonstrated by the fact that the price action managed to penetrate above the 23.6 per cent Fibonacci retracement level at 1.18276.

Subsequently, EURUSD's price action closed above the 50-day MA (in green), serving the role of a floating resistance. The strengthening of the price above said resistance is demonstrative of the strong bullish commitment in the short term.

EURUSD's price action is set to test the 38.2 per cent Fibonacci retracement at 1.18559 next. The latter is converging with the 100-day MA (in blue). A potential reversal from this turning point could prompt a dropdown towards 1.18276 from above.

Conversely, a breakout above 1.1859 would potentially clear the way for further appreciation towards the 61.8 per cent Fibonacci retracement at 1.19017.

The Adoption of a 2.0 per cent Symmetric Inflation Target

The major development in ECB's new monetary policy strategy involves the adoption of a 2.0 per cent inflation target. Previously, the Governing Council was striving to achieve inflation converging towards but falling below 2.0 per cent. ECB's new monetary policy outlook is now closer to the one of the Federal Reserve in the U.S.

Part of the reason the euro is currently advancing against the otherwise recuperating greenback has to do with the fact that the ECB is now willing to become even more lenient with regard to inflation growth.

"The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable. […] This may also imply a transitory period in which inflation is moderately above target."