The euro has dropped back modestly against the US dollar over the past week. The main event risk in the week ahead will be the European Central Bank last policy meeting on Thursday. Diverging ECB and Fed QE policy discussions are set to weigh on EUR/USD in near-term but not trigger a sustained reversal lower, according to economists at MUFG Bank.
Market should be well priced now for no change in pace of QE purchases
“The improving growth outlook is unlikely to prove sufficient though to prompt the ECB to announce a slowdown in the pace of QE purchases. Recent dovish comments from ECB officials have pushed back against early QE taper expectations. The majority of economists now only expect the ECB to announce slower QE purchases in September.”
“The ECB is also expected to release the conclusions from their monetary policy strategy review in September which is shaping up to be a bigger event risk. The ECB’s reluctance to slow purchases so soon reflects concerns over the risk that financial conditions could tighten prematurely and undermine the recovery.”
“We expect the ECB to signal next week that ‘purchases will be maintained at around the current pace’. The market reaction should be limited as euro-zone yields have already adjusted lower in recent weeks. In the first hour following the last two ECB policy decisions the EUR has weakened marginally. We expect a similar reaction this time around.”
“A divergence has opened up recently between the ECB and Fed who have signalled a willingness to discuss QE tapering at upcoming meetings. It will help dampen upward momentum for EUR/USD. However, the developments are not sufficient to alter our bullish outlook for the pair beyond the near-term.”
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