Subdued Eurozone Inflation May Push the ECB to Act

by Bogdan Giulvezan

The Euro Is Under Pressure 

Consumer prices stagnated and retail sales failed to impress across the Eurozone, facts that may work in conjunction with an increasing number of COVID-19 cases to keep Eurozone inflation subdued in the near future.

The lack of consumer price increase may prompt the European Central Bank to adopt Average Inflation Targeting (AIT). Quoting ECB President Lagarde: “the wider discussion today is whether central banks should commit to explicitly make up for inflation misses when they have spent quite some time below their inflation goals”.

She further added that AIT could help to “strengthen the capacity of monetary policy to stabilise the economy when faced with the lower bound because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates”. The ECB President is scheduled to make several public appearances this week, a fact that may shed more light on how the ECB decides to deal with the problem going forward.

On the other side of the pond, the health of U.S. President Donald Trump is still of concern, as he was diagnosed positive for COVID-19, yet decided to make a public appearance, a fact criticized by some. However, he remained inside his Presidential car, which is not only bulletproof but also protected against chemical attacks, thus hermetically sealed.

The Week Ahead

Tuesday, October 6 at 9:35 am GMT, ECB President Christine Lagarde will speak at the Wall Street Journal’s online CEO Summit, and a few hours later, at 2:00 pm GMT, she will participate in a virtual panel discussion, celebrating the 10th anniversary of the European Stability Mechanism.

The same day, at 3:40 pm GMT, Fed Chair Powell will speak at the National Association of Business Economics annual meeting on the topic of the US economic outlook. Audience questions are expected, thus volatility may increase.

Wednesday, October 7, ECB President Lagarde will speak again, this time at the Paris Europlace online International Financial Forum. The scheduled time is 1:10 pm GMT. Later in the day, at 7:00 pm GMT, the FOMC will release the Minutes of their latest Meeting, outlining the reasons and economic conditions that influenced their latest interest rate vote. The events outlined above may have a strong impact on the Euro and US Dollar but keep in mind there are other releases scheduled throughout the week, all with potential impact.

The Technical Scene

The pair failed to move above the previous support (now resistance) located at 1.1750, although it showed a very nice bounce from the level at 1.1615. The way price behaves around the current level will offer strong clues for the week’s movement but overall, the pair is under bearish pressure.

A Daily close above 1.1750 would indicate that we may see some sort of continued upside movement but the extent should be limited as long as price remains below the recently broken trend line. On the other hand, a bounce lower from 1.1750 would likely trigger a move through 1.1615 support. As always, keep an eye on the economic calendar for any releases that may affect price movement.