23.07.202111:21 Forex Analysis & Reviews: ECB decision threatens outlook for euro. Tension between UK and EU escalates again.

Euro declined amid ECB decision to maintain a soft monetary policy. Meanwhile, pound rose and won back the losses it had this week.

On Thursday, ECB chief Christine Lagarde said the ongoing growth in inflation is temporary, as the underlying price pressures are expected to increase gradually. She said the indicator will remain below the target level over the medium term.

In short, the central bank projects that inflation will continue to rise in the coming months, but will return to 2.0% next year. This is why they decided to maintain a soft monetary policy, stressing that interest rates will remain at or below current levels until inflation "permanently" stays around the target level.

Lagarde also pointed out that the current increase is largely due to higher energy prices and underlying effects of the collapse in oil prices at the start of the coronavirus pandemic. Germany's move to return VAT to its previous level also had a serious impact on inflation. But all these should disappear by the end of 2022, except perhaps the growth in prices, as demand and supply will continue to recover.

The markets already expected these statements, so euro did not decline very seriously.

As for the United States, a report on jobless claims was published yesterday, but the data surprised many analysts. Instead of decreasing to 350,000, initial filings for unemployment benefits rose to 419,000, which is 51,000 higher than the previous week. This clearly means that recovery in the labor market will not be easy, and seasonal factors will continue to affect it. The less volatile four-week moving average also climbed to 385.250.

With regards to continuing claims, the number fell by 29,000 to 3.236 million.

Considering all this, EUR / USD remained stuck in a horizontal, but with a slight advantage for sellers. So, today, a lot depends on 1.1755 because dropping below it will result in a further decline to 1.1720 and 1.1680. But if the quote returns to 1.1780 and 1.1805, EUR / USD will climb to 1.1830.

GBP

Surprisingly, pound traded upwards on Thursday despite the EU's refusal to reconsider the Brexit regulations regarding Northern Ireland. It returned to weekly highs, thereby winning back all the losses it had earlier this week.

But talking about the standoff between the UK and the EU, Prime Minister Boris Johnson has again warned that he will suspend some parts of the agreement if the EU does not budge and make concessions.

Under the terms of the current protocol, goods moving from the UK to Northern Ireland are subject to customs checks and procedures as if they were moving to the EU. Politicians in Northern Ireland and the United Kingdom have complained that an efficient trade border in the Irish Sea threatens the territorial integrity of the United Kingdom, which will reduce future trade flows to the region. But the EU insists that the protocol should be implemented in accordance with the original agreement, as only this will help protect the single market and prevent Northern Ireland from being used as a loophole for EU smuggling.

The EU's rejection to UK's proposal to revise customs regulations, cargo declarations, fisheries and access to financial markets further exacerbate the tension between the two countries.

Going back to pound, a lot will depend on 1.3740 because climbing above it will result in an increase towards 1.3785, 1.3820 and 1.3860. Meanwhile, dropping below the level will lead to a collapse to the bottom of the 37th figure, or even lower to 1.3675.