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Will ECB soft policy help EUR growth?

The demand for risks is resuming with a vengeance in world markets. This is happening against the backdrop of confidence in massive stimulus in the US, as well as signs of recovery in manufacturing activity and exporters’ incomes in Europe and China. Asian markets are updating highs on higher trading volumes, which is an additional bullish signal, indicating new money is coming in. The foreign exchange market is seeing strong demand for the British pound and the Australian dollar. GBPUSD and AUDUSD have returned to more than two-year highs at 1.37 and 0.78 respectively, from where they pulled back earlier in January. These are all signs of risk-on sentiment, in addition to the highs of Asian and US key stock indices. EURUSD has managed to stay above the 50-day moving average, finding buyers on the dip below 1.2070, but has not yet been able to go up. It is possible that a local bull-bear dispute will resolve today’s ECB meeting. No policy change is expected from the ECB, but investors and traders will heed the tone of the bank’s president, Christine Lagarde. Forecasts for the Eurozone economy are clearly deteriorating due to the latest wave of the pandemic, which caused a hard lockdown in many countries. At the moment, we see that the authorities of the largest economies are in no hurry to ease restrictions, promising to put pressure on service sector indicators. At the same time, production figures and the level of business optimism in general surprise investors. Lagarde’s willingness to provide new incentives, coupled with warnings of heightening risks of a second recession, could spur purchases of government bonds in the region and support the inflow of funds in euros. The same approach was preferred by the Bank of Japan this morning. Note that in times of heightened economic uncertainty, the big three central banks – the Fed, the ECB and the Bank of Japan – prefer to move in the same channel. The ECB does not act aggressively, softening its policy, which does not create glut in the single currency markets. Quite the opposite, traders often increase their purchases of the euro at the announcement of stimuli, suggesting more confident economic growth in the future. Thus, the soft tone of Lagarde’s comments may well bring the euro back to the uptrend that formed in May. An alternative scenario will be triggered if the euro falls below the 50-day moving average, which will mark the breakdown of the upward trend, aiming the pair at 1.1900-1.1950. ______________ Alexander Kuptsikevich, Lead Analyst, FxPro

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