FX.co ★ ECB changes stance on tapering

EUR/USD closed above 1.1300 on Monday, in part due to the Fed not disclosing the results of its unscheduled meeting yesterday. Another reason was ECB chief Christine Lagarde who, despite her harsh tone following last month's meeting, said the central bank would not rush to lift EU stimulus. "We have to be open about what we can and cannot do as a central bank," she told MEPs on Monday. "Everyone must understand that our monetary policy cannot fill pipelines with gas, clear port congestion, or train more truck drivers." With such statements, Lagarde made it clear that not everything is in the hands of the central bank. Authorities need to cope with current problems on their own, not through stimulus support programs.

Faced with the fastest inflation in eurozone history, Lagarde has become more aggressive since the ECB meeting last month, refusing to rule out a rate hike in 2022. As such, the European Commission predicts that consumer prices will rise by 3.5% y/y in 2022 and increase by 1.7% in 2023.

The ECB also announced last year that it would cut all economic support programs that functioned during the coronavirus pandemic. But last week Lagarde warned that tightening monetary policy too quickly could jeopardise Europe's economic recovery. "Any adjustment to our policy will be gradual," she said. "Our target is an inflation rate of 2% over the medium term. To do this, we will take action at the right time," she added.

Lagarde's position is supported by other politicians, and several ECB officials stressed the need for a more gradual change in policy. Board of Governors member Olli Rehn even warned against a sharp reaction to short-term inflation, saying it's best to look at price forecasts for 2023 and 2024 once the current energy price surge and supply chain disruptions subside. He said the central bank should look beyond the current spike in inflation as it determines monetary policy from the position of not stifling the observed economic growth. "If we reacted sharply to inflation in the short term, we would probably stop economic growth," Ren said.

Inflation in the eurozone is already above 5.0%

But even though wage growth in the euro area remains subdued and inflation is high, it is unlikely that such a discrepancy will persist for a long time. The risk also represents broader labor costs, but there are no major changes in this direction. That is why the Board of Governors meeting scheduled next month is a suitable occasion to discuss possible future adjustments.

Technical analysis for EUR/USD

A lot depends on 1.1340 because a breakout will lead to a further rise to 1.1380 and 1.1415. Meanwhile, a dip below the level will result in a deeper decline to 1.1270, and then to 1.1230.

Technical analysis for GBP/USD

A lot depends on 1.3570 because a breakdown will lead to a larger jump to 1.3605 and 1.3640. Meanwhile, a drop below 1.3495 will result in a further decrease to 1.3430 and 1.3360.