Summary:

  • The ECB meeting on Thursday can have a major impact on EURUSD
  • Draghi may try to curb euro strength but markets are sceptical
  • EURUSD is in a bullish mode, nearest support at 1.2215
  • The key post meeting conference begins 1:30pm GMT

The ECB meeting is the most awaited market event in January. Bank will need to address speculations about a termination of the QE program at the end of September and a timing of the first interest rate hike. In this analysis we try to answer the key questions ahead of the meeting.

What will Draghi say?

Draghi will stress that the economy is doing well but inflation remains below the ECB target. In fact December inflation was 0.3pp lower than the ECB expected just 10 months ago despite economic recovery that was above expectations. So for Draghi a strong economic recovery is not an assurance that inflation target will be met, especially if a strong euro dampens inflationary pressure. Draghi will likely stop short from addressing the euro directly (saying that it’s not a policy target) but may suggest that interest rate hike will take place long after the QE program ends. By saying this he may try to limit upside for the euro.

Why markets could not trust him?

For 2 reasons: economy and conflicting views at the Bank. The EMU economy has a lot of momentum at present and markets may assume that regardless of the euro rate the ECB will need to make an exit from current policies. More importantly while Draghi sounded dovish in December, minutes from the meeting revealed that many members wanted to prepare markets for tighter monetary policy. So unless Draghi is really decisive, markets may read his comments as a bluff.

What are major banks saying?

Banks are a bit divided. A cautious tone prevails but do notice that banks do not see a major reversal on the euro:

ING: While the central bank is likely to toe the party line of a strong EUR being a ‘source of uncertainty’, President Draghi may struggle to find evidence suggesting that the recent move higher in the EUR has been anything but justified by fundamentals

BNP Paribas: We think it is probably too early to expect a change in ECB forward guidance at this week’s meeting. EUR bulls may view January’s meeting outcome as slightly more dovish, resulting in a moderate pullback in EURUSD towards 1.21

Nordea: pricing of the first hike suggests an abrupt end to the APP after September and a rate just over three months later. Such pricing looks too aggressive

Bank of America ML: the single currency is vulnerable to comments from President Draghi during the Q&A session who may take the opportunity to address the recent appreciation

Barclays: we expect some profit taking of long EURUSD positioning ahead of the meeting. Nonetheless, we expect dips to be shallow

How does EURUSD look on the chart?

link do file download link

EURUSD keeps charging higher and bulls are in control unless the pair returns to the channel. Its upper limit acts as a support. Source: xStation5 

After breaking 2017 highs the EURUSD chart looks very bullish. We saw a minor profit taking last Wednesday but bulls used an upper limit of a previous upwards channel as a support and rallied from there. There is no resistance in sight other than local lows from 2013 around 1.2750. Even if there is another profit taking, the nearest support is at 1.2215.