ECB causes no harm, and data fail to help (Daily analysis 23.07.2021)

Over the last week, markets have been very volatile. The initial sharp flight from risk gave way to a rebound, which has also lost its momentum.

The equity markets and oil prices quickly rebounded after the sharp plunge, but the dollar is not out of favour among investors. The Bitcoin price has not broken the 30,000 USD threshold, but it is too early to rule out further declines in the price of the most popular cryptocurrency.

Positive signals from the eurozone do not detract attention from the dollar

In July, concerns began to dominate that the pace of recovery was starting to lose steam, with a significant role played by the delta variant of the coronavirus, which fuelled pessimism. The latest signals from eurozone economies, i.e. today's PMI index readings, allow us to remain positive on growth prospects. The combined index reflecting the condition of eurozone services and industry has even risen to levels not seen since 2000. However, the readings are not enough for investors to turn away from the dollar, which remains strong.

The industry has been strongly boosted for many months worldwide (in Poland, for example, the pandemic slump was already reversed in the autumn). Finally, the time comes for services to take over, rebounding after the lifting of restrictions. This also translates into strong employment growth. The supply disruptions in the goods markets are a fly in the ointment (e.g. problems with component availability, disrupted supply chains, delivery delays), which in the industry are starting to affect production volumes and are also pushing up prices.

Fading perspective for increases with no impact on the euro's exchange rate

From a big cloud comes little rain - that is how the European Central Bank's meeting can be described. The bar for expectations was raised high since only two weeks earlier, a new monetary policy strategy had been presented. The most important modification is the abandonment of the inflation target set at "close to, but below, 2%" in favour of a more common symmetric target, which in this case is a range around 2%. This change required modifications to the communication with the market, especially as regards announcements and forward guidance on when to expect interest rate increases. Christine Lagarde's statement and comments deviate from the previous position to the minimum extent possible. The reform of the strategy will undoubtedly require an even longer delay in interest rate movements.

However, hardly anyone expected an increase in the cost of money to appear on the horizon. The prospect was so distant that its additional postponement does not hurt the euro. Inflation in the eurozone, after the just-ended one-off hike, is clearly slowing down again. There was also no indication given as to the future of the pandemic asset purchase programme (PEPP), which is due to expire at the end of March. The ECB's September forecasts will play a key role in this area. The EUR/USD failed to separate from 1.18 in reaction to the meeting's tone. The ECB's policy will continue to weigh on the euro, just as it has been in previous months. From Lagarde's words on inflation, it is possible to infer a continued reluctance to strengthen the single currency. Evident declines in the EUR/USD pair (keeping the dollar at elevated ceilings) will only come into existence if the US rate hike moves to 2022. Given the recent wave of fears of a slowing economy, we believe that the Fed will not panic due to the threat of inflation getting out of control.