So far in 2020, central banks have been very active as they responded to the pandemic with emergency measures. However, today’s meeting of the European Central Bank is likely to be a damp squib and will disappoint those looking for more action.
The ECB has already increased asset purchases substantially in its previous two meetings. So, it makes perfect sense for a pause to assess how the impact of its policy response has or will affect the economy in the coming months. Policymakers will also want to see how strong or otherwise the early stages of the recovery may look like now that major economies are re-opening. In addition, the ECB will want to see whether the European Union leaders will be able to come to an agreement on the recovery fund before making any further monetary policy adjustments.
Thus, no new policy measures are expected to be announced today.
So, how will the euro react? Probably not too significantly. Investors will still want to look for hints on future shifts in policy, as expectations remain that more asset purchases will be announced before the end of the year as the Eurozone’s recovery from the coronavirus pandemic should remain bumpy, while many other economies outside of the single currency block – including some of its key trading partners – are still in deep recession. Christine Lagarde will continue to strike a dovish tone and express the ECB’s commitment to act further if and when more policy response is needed. But this is priced in, and unless she comes out with something significantly more dovish then the euro may continue to drift higher, even though it has come off its recent highs this morning amid profit-taking.
But the
path of least resistance continues to remain to the upside for the EUR/USD, and risk assets in general – at least for now anyway:
Source: TradingView.com and ThinkMarkets
The EUR/USD has been drifting higher over the past several weeks as it closes in on the 1.15 handle. If it gets there is a sharp move today, then watch out for either a clean break or a fakeout. If it closes well above this level today, then the bullish trend will likely continue for a while yet. However, a false break could see rates reverse sharply, especially if we see a corresponding move in other risk assets such as equity indices.