The common currency reacted positively to the first strategy review by the European Central Bank (ECB) in thirteen years. The EUR/USD rose close to one hundred pips on a less dovish statement.
The ECB has taken its time to release its latest strategy review. It worked on it for eighteen months, delaying the release several times due to the COVID-19 pandemic.
For traders of the common currency, this was the event of the week. It influenced the price action severely, putting a floor behind the EUR/USD drop, as the pair rose close to one hundred pips on the event.
Details of the First ECB Strategy Review in Thirteen Years
The expectations were that the ECB would follow the Fed’s lead and announce a shift to average inflation targeting. In some way, it did, as the new strategy is designed to let inflation overshoot above the central bank’s 2% target for a transitory period.
However the ECB insists this is not average inflation targeting. It calls it a symmetric 2% inflation target – a type of very soft version of average inflation targeting.
The central bank was very careful in choosing its language. Through the voice of its President, Christine Lagarde, the new strategy shows the ECB’s intention to include Occupied Housing Costs (OHC) in the HICP (Harmonised Index of Consumer Prices). HICP is the favoured way to measure inflation in the Euro area, and by changing the basket’s composition, the ECB wants to get more accurate data.
The strategy review was approved unanimously by the European national banks, and it also includes a climate-related action plan. More precisely, from now on, climate change gets its own press release at the ECB, including risk assessment, statistics, and, more importantly, its own Quantitative Easing (QE).
Euro traders viewed the event as bullish for the common currency. The symmetric 2% inflation target approach is not that aggressive as the average inflation targeting from the Fed and thus, the main currency pair, the EUR/USD, bounced from its lows. Its strength spilled over to other euro pairs in a clear bullish market reaction to the changes announced by the ECB.