COVID Concerns Pressuring ECB

With concerns over the developing second wave of COVID-19 reaching fever pitch in the eurozone, the market is eagerly awaiting the ECB’s October monetary policy meeting on Thursday. While no fresh adjustments are expected at this stage, the focus will be on the ECB’s forward guidance and, within that, the market is strongly expecting ECB governor Lagarde to provide a clear signal that further easing is coming.

As the number of new infections and deaths begins to rise at an accelerated pace across much of the eurozone, there is a growing fear that countries will be plunged into fresh, nationwide lockdowns over the coming winter months. So far, countries have opted for regional lockdowns though many health authorities warn these measures are not strict enough. Traders will be eager to learn how the ECB is assessing the current situation and how severe it deems the downside risks to be over the coming months.

Virus Resurgence Ahead of Schedule

ECB chief Christina Lagarde has recently acknowledged that the eurozone is facing a worse crisis than initially thought. While the bank had been preparing itself for an uneven recovery, the resurgence of the virus has come well ahead of schedule and is posing a high level of risk to the eurozone economy.

Easing Expected in December

The message at the October meeting this week is likely to be one of extreme caution with the ECB looking to reassure markets that it still has plenty of room to act further if necessary. With around half of the $1.35 trillion in asset purchases announced earlier in the year still unspent, the ECB still has plenty of scope for additional easing. However, asset purchases alone are unlikely to be enough to backstop the economy in the wake of a return to prolonged lockdowns over the winter and so the market will be focusing on the full scale of the operations the ECB intends to use in a worst-case scenario. Currently, the market is projecting a further 500 million EUR of easing by the end of the year. The ECB is in a tight spot here because, although it can’t afford to give too much away, any failure to properly reassure markets could see EUR ramping higher in disappointment, which would hurt the eurozone more.

Technical Views

EURUSD

From a technical viewpoint. The breakout above the bearish channel has seen EURUSD rallying back above the 1.1802 level resistance. While price holds above here, the market is poised for further gains towards the major 1.2090 level. However, should price fall back below the 1.1802 level, attention will turn to support at the 1.1490 region which bulls will need to defend to keep the upside view intact.

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