EUR/USD price action was propelled higher on Wednesday. The major currency pair likely benefited from broad US Dollar weakness thanks to fading covid concerns and improving market sentiment. EUR/JPY gained ground as well, but the Euro turned lower against most other FX peers with traders focused on event risk posed by the European Central Bank meeting this week.

The ECB rate decision is scheduled to cross wires Thursday, 22 July at 11:45 GMT. ECB President Christine Lagarde is due to follow up with a press conference shortly afterward at 12:30 GMT. Event risk posed by the ECB meeting, which follows its recent monetary policy strategy review, is corresponding with a relatively elevated overnight implied volatility reading for EUR/USD.

In fact, EUR/USD overnight implied volatility of 7.9% ranks in the top 86th percentile of measurements taken over the last 12-months and is above its 20-day average reading of 5.4%. This suggests an implied trading range of 98-pips for EUR/USD. To be fair, though, that seems relatively muted for a central bank rate decision accompanied by updated economic projections.

EUR/USD PRICE CHART: DAILY TIME FRAME (01 MARCH TO 21 JULY 2021)

This could be because no actual changes to ECB policy are expected to be announced on Thursday. As such, traders will likely pay close attention to forward guidance provided in the statement and by ECB President Christine Lagarde. To that end, the ECB strategy review detailed a tweak to how the central bank views inflation. Specifically, the ECB now seeks to have inflation average 2% in the long-run, which gives more leeway for inflation overshoots.

Details of QE packages deployed by the European Central Bank, which collectively serve as a tool for helping achieve its inflation mandate, thus stand to see heightened scrutiny in the wake of tomorrow’s announcement. That brings to focus potential adjustments that could be made to the ECB’s standing asset purchase program (APP) announced in 2014 or the pandemic emergency purchase program (PEPP) set to expire March 2022.

While there may be some differing opinions at the ECB Governing Council about whether or not to scale back accommodation, there could be a collectively cautious and patient tone conveyed due to the recent bulge in downside risks to economic activity posed by the delta covid variant. At the end of the day, the impact on EUR/USD will likely hinge on the balancing act between reinforcing ECB credibility and boosting growth outlook.