Lagarde leaves rates unchanged, moves focus to inflation & exchange rate – Market Overview

Lagarde leaves rates unchanged, moves focus to inflation & exchange rate – Market Overview

No change in ECB policy, all eyes on inflation.

ECB meet-up

The meeting and press conference of the European Central Bank passed without significant impact on the market yesterday.

As expected, they left interest rates unchanged and did not alter their asset purchase program. At the press conference, President Lagarde made a brief allusion to the Euro exchange rate in the sense that its recent strength was an obstacle to achieving inflation targets and that they would continue to monitor it closely, but this had no impact on the market.

EUR /USD rose after the meeting, from 1.2130 to 1.2170 and then back to the area of ​​1.2150 where it is currently.

The reason for this rise is partly due to a slight fall in the Dollar but also to the phrase introduced in the statement of the ECB meeting in which they indicated that if the economy has a reasonable recovery rate, they will not use the full amount of the program of purchase of assets. This statement has no significant relevance, it is obvious, and it is seen as a symbolic concession to the Governing Council of the European Central Bank's hawkish.

But in the course of the Asian session and at the beginning of the European one, the risk sentiment seems to begin to change concerning the one that has dominated for practically the entire week.

The North American indices show slight losses, and the US Dollar strengthens, losing part of the territory recently gained. This could be a market reaction of a technical nature and the closing of positions on the last day of the week. Especially in the European case, an increase in risk aversion due to the worsening of the pandemic situation.

The UK

In the United Kingdom, the environment minister has stated that his government is seriously considering the possibility of a total borders closure, a step beyond the current strict measures to restrict internal mobility. This would be a massive setback in the recovery process, not only for the UK but also for Europe.

If we add to this the December UK retail sales figure that was just released with data of only 0.3% versus 1.2% expected, the reasons for the market to return to risk-off mode are greater. This economic figure is one of those that best reflect the negative effect of the pandemic crisis. Restrictions and confinement depress consumption and retail sales.

The British Pound has reacted with a sharp decline after a week of continued rises that led GBP/USD to hit the highs at 1.3740, after breaking the resistance at 1.3700, but has now lost again to the rise of Investor concerns about the epidemic situation in the UK. Below the pair finds its first supports in the area between 1.3650 and 1.3620.

Sources: ForexLive.com, Bloomberg.

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