The Delta strain depression that covered the markets on Monday has faded into the background, as the victorious tread of companies reporting quarterly profits pulls up stock markets, which stimulate a return of demand for risk. The dollar index is still growing largely due to the weak euro after the ECB meeting, but commodity currencies are already feeling noticeably better. Meanwhile, bond yields are declining around the world.
Biden's infrastructure plan did not pass the stage of a procedural vote in the Senate, but the US President assures that the plan will be adopted next week after some improvements. This event can give the US dollar an additional positive impulse.
A slight pullback in sentiment is regarded as temporary. Today, all the attention will be directed to the reports on business activity (Markit PMI), but any movements are possible only in case of noticeable deviations from the forecasts.
The ECB's meeting on Thursday made the euro the weakest currency for the past day, and although it managed to stay in the consolidation zone, its prospects have become worse. The ECB statement, designated as the "revised interest rate guidance", which was opposed by two members of the Governing Council, namely, the German Weidmann and the Austrian Wunch, reads: "The Governing Council expects that the ECB's key interest rates will remain at the current or lower level until it sees that inflation will reach two percent well before the end of its forecast horizon and will remain until the end of the forecast horizon."
In other words, the ECB has made it clear that absolutely no hawkish actions should be expected from it, since even an increase in inflation will not yet mean that it has become permanent. The economic recovery is going according to plan, but employment is about 3.3 million below the pre-crisis level, and the temporary nature of inflation is explained by the strong influence of energy and the increase in value added tax.
ECB President Lagarde confirmed at a press conference that the goal of the National Bank is not to keep rates low for as long as possible, but to achieve the inflation target. Nevertheless, the changes made to the management caused rejection among two ECB members.
As for the practical steps, there are no changes here. The new (pandemic) PEPP emergency asset purchase program should continue at least until March 2022 in accordance with the previous guidance, and the earlier asset purchase program, the same QE, thanks to which the ECB inflated the balance sheet more than the Fed, should continue at the same pace of 20 billion euros per month until the ECB raises rates. And the rates, as we have already understood, will not be raised soon.
In conclusion, the ECB does not and will not have plans to intensify the exit from soft policy. The euro will lag behind market trends, and this will put strong bearish pressure on it at least in the future until next spring.
The euro's target level of 1.1770 set on Monday has been reached. There are even fewer reasons for an upward reversal, so we are waiting for the movement to the next target 1.1704.
The pound declined to the support level of 1.3575. Its prospects still look quite weak and there is a small chance of an upward correction.
Leading central banks, adjusting their monetary policy during this difficult period, primarily consider the pace of labor market recovery and inflation as key evaluation parameters. The high level of US inflation is due to factors that are very different from the UK. According to NIESR, UK inflation is unlikely to catch up with prices in the US. The model suggests that growth may temporarily rise to 3%, but a wave of decline will follow from the spring of 2022, which will limit any activity of the Bank of England.
The growth is limited to the resistance zone of 1.3830/50. If one tries to grow there, sales may resume. The target is set at 1.3512, 1.3475, and the long-term one is 1.3161, representing a 38.2% correction from the growth of 2020/21.
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