EURUSD seems to be looking for an excuse to assault the $1.10 level and the ECB could provide the ammunition. But it might also prove a big disappointment.

The pair has so far failed to maintain much momentum since the French election result produced a wave of relief across markets that helped to send EUR higher against its peers. It’s found it tougher going against the dollar than versus the yen for instance, but with the European Central Bank meeting on Thursday there is a potential gear shift in store.

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The ECB is not expected to alter policy at this meeting but a Reuters report citing three sources close to the Governing Council suggested the central bank will seek to send a signal about tapering by June. It may therefore adopt a more hawkish tone in preparation but it’s interesting that EURUSD has failed to hold its gains following the report. However if it breaks resistance at $1.10 it could be have more upside.

What to expect from the ECB:

With the bank unlikely to change policy, all eyes are on the press conference with Mario Draghi and the language in the accompanying statement.

Draghi has the opportunity to sound more bullish but will he take it by the horns or maintain his dovish credentials? Experience tells us the latter.

Political risk has been a key factor in the ECB’s calculations. The French election makes the ECB more likely to consider a taper/rate hike, but it probably won’t be in a hurry as inflation remains disappointing. Draghi and company have been talking up political risks as having a material downside risk to the Eurozone. Have these vanished? The market-friendly Macron is odds-on but French workers jeered the president-in-waiting on a factory visit on Wednesday, highlighting that this is not a done deal by any means.

Tapering by September..? It’s possible but the soggy inflation numbers just aren’t playing ball. It feels like we could be in for a good year of overly-optimistic taper talk ahead of each ECB meeting before we get anything like tightening.

Risks gone?

Goldman Sachs reckons the ECB will continue to see risks as tilted to the downside. Certainly there are concerns but with the existential threat to the Eurozone (almost) vanquished for the time being there is reason to be a lot more optimistic.

Data is mixed – inflation had been creeping upwards and we thought perhaps a corner had been turned. But a dismal set of figures from March that showed core inflation dropping back to 0.7% was a bit of a shocker and confirms what Draghi says when he warns the recovery in prices and activity does not yet look self-sustaining. Pull away the QE support and it could all go bad again.

Draghi may also not like to see the euro appreciate much more and anything remotely like taper talk will be a massive red flag for euro bulls who are simply desperate to drive the euro higher. The Italian has disappointed euro bulls plenty of times before - this may be another one of those occasions.

Previous meeting recap:

At its March meeting the ECB dropped from its introductory statement to the press the line: “If warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate.”

Draghi said this was removed because the ECB wants to signal there is no longer the sense of urgency in taking further action. The message was that deflation has been slayed but the euro again failed to find any kind of momentum. The difference now is that French elections no longer look quite so scary.

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