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Euro slipped on Tuesday amid weak economic data from Germany. The ZEW Institute reported that investor sentiment in the country fell, pushing demand for the European currency down. Surprisingly, pound also dropped more than 150 pips even though service data from US was also weak. Apparently, there was a strong selling pressure in the currency throughout the day.
Perhaps, one of the reasons why risk appetite decreased is the upcoming meeting of the European Central Bank. The bank is approaching the final stages of its largest strategy review in nearly two decades, and officials are seeking to iron out key disagreements over the future of monetary policy.
ECB members will gather to discuss the issue raised by Christine Lagarde in early 2020, which is about agreeing on a new inflation target. Further moves on addressing climate change and the ever-changing labor market will also be in the spotlight.
The first meeting will take place today and the official results will be announced later this week. Several meetings are scheduled, and some may be even held in person if health and safety regulations permit. However, the outcome is still uncertain because there are still key disagreements between the members.
In the past year, the Eurozone faced a debt crisis, followed by a financial crisis. Then, amid record low interest rates and political innovations, the ECB was unable to achieve its target inflation. And sadly, when the central bank was close to achieving its goal, the COVID-19 pandemic began, causing the deepest recession.
All ECB members agree that they should change the approach on defining the inflation rate, but there are divisions over the proposed options. Some favor a clear target of 2%, while others want to see higher rates, just like what the Federal Reserve is now adhering to.
Bundesbank President Jens Weidmann and ECB Board Member Isabel Schnabel are among those skeptical about the approach. Hence, many expect the ECB to maintain their 2.0% inflation target.
But if there are dramatic changes in policy, volatility will surge in EUR/USD. A lot will depend on the base of the 18th figure because dropping below it will result in a collapse towards 1.1770 and 1.1715. On the other hand, if bullish traders manage to bring the quote above 1.1850, EUR/USD will be able to climb to 1.1890 and go beyond 1.1930 and 1.1980.
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