Euro bears are eyeing ECB while bulls are monitoring Washington - what comes next

EURUSD Daily Chart



The euro could spark further issues to European Central Bank (ECB) President Mario Draghi on Thursday if policymakers significantly change their language on monetary stimulus.

The euro is expected to strengthen further on Thursday if the ECB gives up the so-called "easing bias" — where the central bank favors a more accommodative policy.

Until now, the ECB has stated that it stands ready to increase the level of bond purchases it makes in both duration and/or size in case the economic outlook deteriorates in the euro zone. Dropping such a statement — the easing bias — would indicate that the ECB believes that prices in the euro zone are increasingly more aligned with its "close to but below 2 percent target." Markets would perceive this as a slight move towards policy normalization, which traditionally pushes the currency higher.

"A removal of the easing bias at this meeting is likely to strengthen the euro," Kjersti Haugland, chief economist at DNB Bank, said in a note Monday.

"The guidance was kept unchanged at the meeting in January, but the accounts from the January meeting confirmed that the Governing Council still expects to revisit the guidance 'early this year'," Haugland said.

Minutes from the last monetary policy meeting in January showed that the bank could announce changes to monetary policy in "early" 2018, but it thought that it would be too premature to change its monetary policy stance at the start of the year.

Almost a third of 56 economists surveyed by Reuters said they expect a removal of the easing bias on Thursday. The same survey, released Friday, showed that the majority of economists questioned said the change will only come in June.

The minutes from the last meeting also showed that the ECB is tracking the euro, saying that the exchange rate was a "source of uncertainty." This is because the currency has surged since the start of the year, especially against the dollar. A stronger euro could have an impact on European exports and affect prices in the region. As a result, the bank could be forced to change its monetary policy stance.

Carsten Brzeski, chief economist at ING, told CNBC Monday that if indeed the ECB decides to completely drop its easing bias as early as Thursday, the euro will strengthen further.

However, if ECB President Mario Draghi delivers only a "very small and cautious shift of the communication, this should push the euro slightly lower," Brzeski said. He added that over the coming weeks, it's likely that the euro will be more impacted by U.S. politics rather than by the ECB's comments.

The euro-dollar exchange rate has often moved on U.S. political developments this year. For example, in January, comments from Treasury Secretary Steven Mnuchin pushed the dollar lower and sent the euro higher.

In January, the euro hit $1.25 against the dollar as Draghi addressed the press following the bank's monetary policy meeting. Despite his dovish remarks, traders believed that monetary stimulus in the region is set to come to an end in the near future, as economic momentum increases and political risks dissipate further in the euro zone.

Source: Bloomberg Pro Terminal

Jr Trader Alexander Kumanov

 Varchev Traders

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