Is the ECB about to spoil the EUR/USD party?

After weeks of somewhat more hawkish commentary from the central bank, which has seen EUR/USD rally, can Mario Draghi live up to expectations?

Mario Draghi, President of the ECB
Source: Bloomberg

Recent comments from Mario Draghi served to keep the euro strong, but with EUR/USD having moved so far in a relatively short space of time, it makes sense to ask whether he can prop up the euro yet further. It is entirely possible that Mr Draghi will take the opportunity to stress that the European Central Bank (ECB) is content with easing at current levels, but that tapering of monthly purchases is also a popular view now. It might pass the buck for now, saying that the duration element of the quantitative easing (QE) programme may be looked at again in December.  

I would be cautious about expecting too much from the meeting. The ECB’s dovish outlook is well known, and it previously voiced concerns about premature tightening of monetary policy. Any discussion at the meeting will likely be conducted within this framework, with the result that the euro is unlikely to receive much of a boost from this angle.

Despite all the recent commentary surrounding a change in ECB policy, we should keep in mind that the bank is not expected to raise rates until 2018 at earliest, and even this may be premature. Remember the gap between the Federal Reserve’s end of monthly purchases (excluding reinvestment of proceeds) and the first rate increase? Perhaps the same could apply to the ECB.

The ECB meeting is likely to bring heightened volatility across the board for eurozone assets, so care needs to be taken. A steady recovery in eurozone markets has failed to break the prevailing downtrend, while EUR/USD remains content to hold around $1.14.

The pair is the key market to watch as it has seen a steady sequence of higher lows since December and a break below $1.13 is needed to reverse this. The next big upside level to watch is $1.1536, last seen in May last year. 

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