The EUR/USD pair rebounded as the US dollar slumped and the European Central Bank (ECB) unveiled its inflation target. The pair rose to 1.1836, which was 0.55% above the lowest level this week.
ECB inflation target
The ECB surprised the market when it set a new inflation target that provided hints that it will keep interest rates low for longer. The bank did that as part of its first monetary policy review since 2003.
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The Christine Lagarde-led bank said that it will have an inflation target of 2.0% and that it will be open to tolerating a small increase above this level when needed. Most importantly, the ECB said that it will start factoring in home prices in its inflation calculator. It said:
“When the economy is operating close to the lower bound on nominal interest rates, it requires especially forceful or persistent monetary policy action to avoid negative deviations from the inflation target becoming entrenched,”
The new strategy will not have an immediate impact, for now. Recent data showed that the Eurozone consumer price index (CPI) increased by 1.9% in June after rising by 2% in the previous month. The decline signalled that the post-pandemic inflation boost has eased. As part of the new strategy, the bank said that it will start targeting its asset purchases to low-carbon industries.
The EUR/USD pair also increased because of the overall dollar sell-off. The US dollar index declined by more than 0.15% as investors reflected on the latest FOMC minutes. The minutes showed that some Fed members were starting to propose tapering of asset purchases.
Still, this hawkish tone did not have a major bullish impact on US bond yields. Indeed, the ten-year bond yield declined to 1.25%, the lowest level since the year started.
EUR/USD technical forecast
The hourly chart shows that the EUR/USD pair declined to 1.1782 this week. It then bounced back today as investors reacted to the latest performance of the bond market. The pair is approaching the important resistance level at 1.1847, which was the lowest level on June 21. It has also moved above the 25-day and 15-day exponential moving averages (EMA). While the bullish trend may continue, there is a possibility that the pair will resume the downward trend.
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