Stronger Euro A Problem Ahead of the ECB Interest Rate Decision Next Thursday


The main event of the week ahead is the ECB interest rate decision on Thursday. The ECB is in a tough spot as core inflation dropped to 0.4%, and the stronger Euro makes it difficult for the central bank to fulfill its mandate.

One of the major themes on the currency market this summer was an extraordinarily strong Euro. The Euro appreciated not only against the USD, but also against other G10 currencies – GBP, JPY, for instance. While the USD declined significantly, the EUR rose, and the main EUR exchange rate, the EURUSD, even traded above 1.20.

The problem for the ECB is that a stronger currency makes it difficult to fulfill its price stability mandate. As a reminder, the ECB has a mandate to bring (and keep) inflation below, but close, to 2%. The favorite inflation measure is the Core HICP – the one that does not consider energy prices, as they tend to distort data. To the surprise of many, it dropped to 0.4% on expectations of 0.9%, leaving the ECB in a tough spot ahead of Thursday’s interest rate decision.

Stronger Euro A Problem Ahead of the ECB Interest Rate Decision Next Thursday

Higher Unemployment and Low Inflation in the Euro Area

The Unemployment Rate ticked higher in the Euro area due to the coronavirus crisis. If it were not for the government-supported programs, the number would have looked even worse.

The problem for the ECB is that low inflation and high unemployment is a recipe for disaster, considering that the interest rates are already at the lower boundary. How to fight low inflation when the deposit facility rate is already below zero for several years now?

All the other unconventional monetary policy tools were exhausted by the ECB so far. It offered cheap loans via TLTROs, it extended the quantitative easing program, and it even offered extended forward guidance compared with what the market participants were used to so far. Yet, the EUR strengthened on the back of the optimism related to the Recovery Fund deal and the joint debt issuance handled by the European Commission.

The ECB made it clear in the past that it does not tolerate the EURUSD exchange rate higher than 1.20. Last week, when the EURUSD traded above 1.20, the ECB’s Chief Economist intervened and delivered a verbal intervention. He just mentioned that, while the ECB does not target the exchange rate, the EURUSD rate matters. And just like that, the EURUSD dropped from 1.20 to 1.18 in the next couple of days.

Expect increased volatility ahead and during the ECB interest rate decision and press conference this coming Thursday.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Latest from Financial Market News

Economic Calendar: US PMI Data, Stock Market Decline, and Oil Surge Britain's Economy: Balancing Act Amidst Gloomy Metrics and Resilient FTSE 100 This Week’s Economic Calendar: US Employment Data, Eurozone Inflation Figures, Canadian GDP Numbers, and Best Buy and Salesforce Earnings Reports Economic Calendar: Jackson Hole Symposium, Nvidia Earnings Report, Canadian Retail Sales Data Economic Calendar: OPEC Report, US Inflation, UK GDP, and China’s Export and Import Data

Latest articles

Forex Analysis

Market Analysis: American Currency Rises Sharply after Fed Meeting

As expected, the decision on the interest rate had a powerful impact on the markets. Thus, the euro/US dollar pair lost more than 100 pp in just a couple of hours and updated its recent low at 1.0630,


Oil Analysis: Finally, A Bearish Reversal?

The policy of OPEC+ countries to voluntarily reduce oil production was one of the drivers thanks to which the price of WTI oil increased by approximately 40% from its low in June. In such cases, it is appropriate to use


Central Bank Week Shakes Up Gold Market

Yesterday, the main event of the week took place — the Federal Reserve meeting, which had a noticeable impact on the market of assets denominated in US dollars. But besides the Fed meeting, there are a number of other events this

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 60% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.