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  • EUR/USD gains 0.21%, extending Thursday’s 0.4% rise. 
  • The ECB boosted stimulus as expected, but souded less dovish than expected. 
  • The dollar remains on the offer on expectations for global recovery and US fiscal stimulus. 

The European Central Bank’s (ECB) less pessimistic tone during Thursday’s monetary policy decision has set the stage for a continued rally in EUR/USD, according to some analyst. 

While the ECB boosted its Pandemic Emergency Purchase Program (PEPP) by $500 billion and extended its duration to March 2022 from the middle of 2021 along with a downward revision of the 2021 growth and inflation forecasts, President Christine Lagarde said that the bank might not need to use the entire PEPP envelope.

According to BK Asset Management’s Kathy Lien, the ECB’s latest measures and comments suggest that the central bank plans to keep monetary policy easy for a very long time, but on balance, is less pessimistic. 

That, coupled with better data, declining virus cases and broad-based US dollar weakness, could power stronger gains in EUR/USD, Lien noted in her daily market analysis. 

EUR/USD jumped over 0.4% to 1.2134 on Thursday and could go a lot higher, exacerbating deflation risk, according to Robin Brooks, Chief Economist at the Institute of International Finance (IIF). Brooks says the central bank should have focused on the mounting deflation risk rather than commenting on the exchange rate. 

“It’s not a good idea for the ECB to talk about the Euro because it invites markets to call the ECB’s bluff, which they are now doing aggressively. EUR/USD is higher than before President Lagarde said they’re watching Euro “carefully.” Better to focus on dangerously low inflation,” Brooks tweeted. 

The pair is currently trading at 1.2160, representing a 0.21% gain on the day. The dollar side of the story remains bearish, with markets betting on a swift global economic recovery on potential coronavirus vaccines and pricing additional US fiscal stimulus alongside an ultra-accommodative monetary policy. A possible pullback in equities could stall the pair’s ascent and yield a temporary decline. 

Data-wise, the focus today is on the German Consumer Price Index for November, the US Producer Price Index for November, and the Michigan Consumer Sentiment Index for December. 

Technical levels