While most analysts who have been polled do not expect any changes in interest rates when the ECB meets tomorrow, we all are anxiously anticipating the comments made by President Draghi following the meeting.
The EUR has moved higher by more than 5 big figures since the January meeting. Given such an aggressive move, it is possible that a comment on the EUR strength may come from the ECB. It is even possible, that in order to stem the tide, the ECB may even issue a “dovish” comment.
We all know how central bank comments following their meetings can affect the market. Dovish comments from the Bank of Canada after their meeting quickly moved the Canadian Dollar past parity. Adding to the concerns regarding the EUR, is the fact that other central banks have weakened their currencies in an attempt to spur their economies. The EUR has strengthened by almost 20% against the JPY, 8% against the GBP, and 7% versus the USD. This EUR strength has the potential to create a very negative effect on the European economy.
We have heard over the last few days that political struggles in Spain and Italy are causing concerns and that this is hurting the EUR. While that is true, I think many are going to start looking at the state of the economy and come to the conclusion that the EUR may have reached the peak of its strength, vis-a-vis the other currencies.
While much of the EUR resurgence can be pointed the move of investors back into the EUR bond markets, this was actually aided by ECB intervention lowering yields. The rise in the EUR could threaten growth the rest of this year and next year. French President Hollande warned the market on Tuesday that irrational currency moves could undermine the economy.
So all eyes once again will focus on President Draghi. As always, he will be considered the voice of reason. Will he hint at future rate cuts? Will he agree with Hollande that the EUR is too strong and need a defined exchange rate target? Or will he merely remind all that the ECB is monitoring these moves and stands ready to act when necessary?
Technically we have threatened 1.3500 all day, only to bounce back toward 1.3535 before falling off again. They DOW at this writing is slightly down, but not to the point that it should adversely affect the Asian equity markets. I expect the downside to be tested through the overnight period. Look for support at 1.3475 to hold, unless something unexpected happens.
The early morning European trading day should remain calm, ahead of the ECB announcement.
Not to be forgotten, the Bank of England also announces rates on Thursday, although all expect no change in either rates or the amount of quantitative easing that is being done.
Bank of England announces at 7:00 am, European Central Bank at 7:45 with the Draghi press conference happening around 8:30 am.
Further reading: Bad news for EUR might be good news later on