EUR/USD: Focus on ECB’s take on the exchange rate

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  • EUR/USD has witnessed a bull market pullback ahead of ECB’s rate decision. 
  • The central bank is expected to maintain the status quo on interest rates and bond purchases.
  • The ECB may attempt to talk down the euro, with the economy facing recession risk.

EUR/USD’s rally has stalled over the past two weeks, and the pair could suffer deeper losses if the European Central Bank (ECB) expresses displeasure over the single currency’s strength on Thursday. 

At press time, the currency pair is trading near 1.2130, representing a 0.3% gain on the day. While the pair has pulled back from multi-month highs near 1.2350 observed earlier this month, it is still up at least 500 pips from early November lows near 1.16.

The central bank is widely expected to keep the interest rate and the asset purchase program unchanged, having partly boosted the level of policy accommodation until early 2022 in December. 

However, the possibility of the central bank jawboning the currency cannot be ruled out.

The stronger euro got attention from policymakers in December. “Concerns were voiced over risks related to developments in the exchange rate that might have negative consequences for the inflation outlook,” ECB’s December revealed said. The minutes also took note of the euro’s record nominal effective exchange rate and its disinflationary impact. 

Besides, the Eurozone economy is facing the risk of recession due to the worsening coronavirus situation and political tensions in Italy and other nations. 

EUR/USD may probe the recent low of 1.2053 if the central bank uses strong words while noting the unwanted effects of the euro’s strength. “The strong euro is a problem, but keeping the door open to more asset purchases if there’s further [economic]weakness could in many ways achieve the same goal of easing demand for the currency,” BK Asset Management’s Kathy Lien noted. 

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