Skip to content

CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved. CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.

ECB preview: where next for the euro?

The European Central Bank is back in the frame, yet with election risk looming, what can we expect from Mario Draghi and co?

European Central Bank building
Source: Bloomberg

Thursday sees the European Central Bank (ECB) return to the fold, with its latest monetary policy decision likely to be overshadowed by the rhetoric and sentiment around the future path of rates. The likeliness of a shift in actual policy is minimal, with markets instead focussing in on updated staff projections and the tone set by Mario Draghi in his statement and Q&A session.

Looking at the next move from the ECB, it is likely the current QE programme will need to be wound down at some point. Given the fact the EBC extended the current asset purchase programme until December 2017, there is also a chance we will see the scheme extended once more later this year. Until then, the only action that looks to be the focus of investors will be the potential for a tapering of the current programme. Mario Draghi certainly has a penchant for talking up the possibility of further easing, thus sparking a devaluation of the euro. The EUR/USD chart below highlights that there is typically a move lower for the euro around the announcement, yet this does not necessarily last.

EUR/USD four-hour price chart

There are a number of factors which will influence whether the ECB will start to push the markets towards a more hawkish thinking or not. Firstly, the price stability mandate of the ECB means the recent 2% rate of CPI should influence the committee towards withdrawing its stimulus, before it runs away. A high rate of inflation means consumers are seeing their real incomes deteriorate if wage growth falls short of the inflation figure. That being said, much of that 2% can be accounted for by a temporary rise in energy prices, which rose 9.2% over the month. With energy prices stripped out, the rate of inflation was 1.2% (see below). For that reason, there is reason to believe we could see a rather defiant Draghi, who could instead focus on the uncertainty associated with the raft of European elections due this year.

Euro CPI chart

Euro area annual inflation and its components, %

  Weight (%) 2017 Feb 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017
All-items HICP 1000.0 -0.2 0.4 0.5 0.6 1.1 1.8 2.0e
All-items excluding:  
>energy 904.7 0.8 0.8 0.7 0.8 1.0 1.1 1.2e
>energy, unprocessed food 829.5 0.8 0.8 0.7 0.8 0.9 0.9 0.9e
>energy, food, alcohol & tobacco 708.8 0.8 0.8 0.8 0.8 0.9 0.9 0.9e
Food, alcohol & tobacco 195.9 0.6 0.7 0.4 0.7 1.2 1.8 2.5e
>processed food, alcohol & tobacco 120.8 0.6 0.5 0.5 0.7 0.7 0.7 0.9e
>unprocessed food 75.1 0.6 1.1 0.2 0.7 2.1 3.5 5.2e
Energy 95.3 -8.1 -3.0 -0.9 -1.1 2.6 8.1 9.2e
Non-energy industrial goods 263.1 0.7 0.3 0.3 0.3 0.3 0.5 0.2e
Services 445.7 0.9 1.1 1.1 1.1 1.3 1.2 1.3e

e=estimate

Looking at EUR/USD, there is reason to believe we could be in for a period of strength, given the potential for a double bottom. The failure to break below $1.0494 provided a clue that we are seeing an end to the downtrend experienced throughout February. A subsequent rally and closed candle above $1.0630 would provide a more bullish outlook for the coming period, with $1.0679 and $1.0730 representing particularly interesting areas of resistance to see the market turn lower once more.

EUR/USD price chart

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IG Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.

Find articles by writer