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In line with the previous forecast of the European Central Bank, the feared effects of post-Brexit seemed to be far from the current state of the economy. As the market participants keep their eyes on the release of the economic confidence and mortgage approvals report, EUR/AUD nudged higher in the session earlier. However, the inflation target of the ECB keeps on haunting the financial market.

After the hawkish comments of the Fed officials these past few days, the dollar has gained strength against a basket of currencies. Fed Chairwoman Janet Yellen even raised the expectation higher as she declared at the Jackson Hole Symposium that improvement in the labor market and economic recovery have been taken  into consideration to implement the rate hike.

During the morning session, EUR/AUD broke the 50 percent Fibonacci level at 1.477.98. The pair strongly opened at 1.47890 with an Intraday high of 1.48059 and Intraday low of 1.47833. At 12:19 UTC, EUR/AUD closed at 1.47852 and found support at 1.47803 while its resistance stood at 1.47852.

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As seen in the chart above, the pair broke the support (1) which indicated a strong possibility of moving higher. The upper barrier (2) was surpassed as well, whereas a reasonable chance that prices were oversold stood. After the expansion, the trend could possibly stay steady (3) as it contracts in the following sessions. Once it goes beyond the resistance at 1.48012 (4) , the pair will likely show a strong trend, provided the price will be close to the outer band.

ECB Relies on Economic Data

Days before the Governing Council’s meeting, ECB President Mario Draghi has been waiting for the results of the economic data. Mr. Draghi was probably weigh in the impact of this data to the policy rate of the bank. Traditionally, the banks consider economic growth, inflation, gross domestic data and debt before making a move on its cash rate.

Amid the reliance of Draghi on the economic data, some market experts were raising their expectations. Peter Schaffrik, head of European rates strategy at Royal Bank of Canada, claimed that there’s anything in the data calendar which was decisive that it will either change the market or the ECB or both. Mr. Schaffrick added, “Inflation is going to go up slightly, but it's not going to go up fast enough to make them think 'we don't need to do anything.”

Inflation Target

In the previous quarter, most of the banks failed to meet their respective inflation targets, and got bombarded with either negative rates or unchanged monetary policy. Initially, the goal of the ECB was to attain or even just get near with 2 percent inflation target, however, the course of market events resulted into low inflation.

As the inflation remain relatively low, it would be hard for the economy to grab instant recovery and uncertainties may arise. Thus, the central bank need to take a deep consideration of this factor before making adjustments in the monetary policy. Inflation in the euro area touched its lowest last July 2009 where it went -0.7 percent. As the ECB had significant measures and economic stability strengthens it climbed in the past few years, However, it started to drop again, a scenario that market experts would not want to happen anytime soon.

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As seen in the image below, during this inflation downturn, the euro also followed the same trend. The EUR/AUD declined to 1.69764 and moved lower at 1.59458 at the end of 2009.

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Conclusion

Considering the factors mentioned above, the FSM News group of analysts forecast a bullish trend for EUR/AUD in the coming sessions. The worst case? Market participants would lose their confidence in the banks to stabilize the inflation in the midst of economic recovery. The ECB us set to have a monetary policy meeting next Thursday. Investors are looking forward to the macro economic forecasts of the governing council. In the meantime, euro would likely stay green.

Latest Euro Exchange rates

As time of writing, the Euro to the greenback exchange rates stands at 1.1164, down -0.21 percent. EUR/AUD converts at 1.47891 while EUR/GBP trades at 0.85429. Further, EUR/JPY closed higher at 1.47905.