Euro Calm, Markets Await Crucial ECB Meet

The euro has started the week with limited gains. In North American trade, EUR/USD is trading at 1.1817, up 0.12% on the day.

ECB expected to adjust forward guidance

ECB monetary policy meetings are generally tame affairs that cause limited movement in the markets. The meeting this coming Thursday is likely to be different, and could well be a market-moving event. The reason is that the ECB is expected to implement significant changes in policy. The ECB presented a strategy review earlier this week and ECB President Christine Lagarde said that there would be a review of forward guidance to align it to the strategy review. This means that we could see some important changes to forward guidance at the meeting.

The strategy review raised the inflation to 2% (up from “below, but close to 2%) and also stated that the central bank would accept “a transitory period in which inflation is moderately above target.” These changes are likely to be incorporated into the bank’s forward guidance. 

The key question is whether these expected changes in policy have been priced into EUR/USD? The ECB remains dovish and shows no signs of raising interest rates anytime soon. Barring any hawkish surprises at this week’s meeting, the current weakness of EUR/USD is likely to continue.

The ECB is viewed by the markets are very dovish, along with the Swiss and Japanese central banks. With the ECB expected to continue its dovish stance, the euro is unlikely to show any significant upswing this week. Once the ECB meeting is behind us, investors will be able to focus on some “hard” data, including consumer confidence and eurozone PMI reports.

EUR/USD Technical

• EUR/USD dropped close to 1.1759 before recovering. Below, there is support at 1.1711
• There is resistance at 1.1867 and 1.1927