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ECB meeting preview: economic downturn could bring dovish shift

Thursday's ECB meeting looks likely to bring a shift in tone, with the coronavirus resurgence spelling trouble for the eurozone recovery.

​When and where?

The forthcoming European Central Bank (ECB) meeting will take place on Thursday 29 October.

European Coronavirus resurgence puts pressure on the ECB

The upcoming ECB meeting has become increasingly important amid a second wave of coronavirus cases throughout Europe and the US. The gradual constriction of business activity throughout the continent puts downward pressure on economic expectations going forward.

That trajectory continues to weigh on sentiment as highlighted by the sharp downside seen in indices such as the DAX. Coming off the back of a 11.8% contraction in the second quarter (Q2), the eurozone recovery will be back in focus when the Q3 reading is released on Friday. Previous projections from the bank pointed towards a 3.1% growth rate in Q4 of the year, although that resurgence is looking shakier by the day.

ECB unlikely to act this time around

The resurgence in coronavirus cases is likely to raise fears for the ECB, with the tone similarly likely to shift towards being willing to act where necessary. Whether that shift takes place at the forthcoming meeting will be a major determinant of near-term volatility.

With Friday’s gross domestic product (GDP) release followed up by a raft of EU forecasts next Wednesday, there is a possibility that President of the ECB Christine Lagarde leads a more hesitant approach at the forthcoming monetary policy decision. Nevertheless, what we do know on the data-front is that inflation remains well below target, with September HICP currently at -0.3% year-on-year (YoY).

As such, there will likely be a focus on how they can shift the dial back into a more positive direction. Watch out for a more dovish tone before long, with a potential amendment to the PEPP and TLTRO-III policy likely coming in December.

Where now for the euro?

EUR/USD has pushed back into the upper echelons of a descending standard deviation channel over recent months. Recent weeks have seen questions arise over the possibility of another turn lower in line with that long-term trend.

The daily chart highlights the recent rise back towards the 61.8% Fibonacci retracement level, with the pair attempting to regain ground lost over the course of September. The question from here is whether this is simply a retracement before the declines continue once more, or a recovery which will result in a continuation of the wider uptrend.

This upcoming meeting should help us shape the future for this pair, with a break through $1.1688 or $1.1918 ultimately required to bring a signal of where we go in the medium term.

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