The most important message from the March ECB meeting has been the apparent shift away from trying to cheapen the EUR and towards policies to stimulate domestic demand by propping up the Eurozone's lending channel. Since then the currency has appreciated while growth data (outside Germany) disappointed and inflation remained low. Most alarmingly, the Eurozone inflation expectations extended their recent slide. Not much is expected to come from the April policy meeting with the ECB still in the process of assessing the impact of the aggressive credit easing measures announced last month.
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Of greater relevance for the FX markets will be indications that Draghi's rhetoric on EUR has changed given that the NEER index is back close to the highs of the year and the fact that the Eurozone inflation expectations have, so far, failed to respond to the rebound in global commodity prices. We believe that Draghi will try to steer clear of making any explicit reference to the currency during the press conference. Supporting this view is the fact that, despite its recent appreciation, the EUR NEER is broadly in line with the ECB assumptions released as part of the staff macroeconomic projections in March. That said, an important caveat here would be that the Governing Council may view any FX appreciation beyond this years' highs as posing downside risks to the current outlook.
The President may try to address this issue by highlighting the temporary nature of the drivers of the recent EUR/USD-appreciation - eg the weak USD, the dovish Fed and the unstable global outlook which is supporting the safe haven appeal of the single currency. If so, the EUR could appreciate anew into the ECB press conference and extend its gains in the aftermath. Draghi will likely confirm the market view that the Governing Council is nowhere near adding more stimulus. While the door will be kept wide open for more easing (if needed), chances are that the markets will take this more as a 'bark' rather than a 'bite' at this stage. The ECB message will contrast with the growing chorus of BoJ officials highlighting the need of additional stimulus ahead. We therefore think that EUR could do well against JPY.
EUR/USD could be supported even though we doubt that sustained gains beyond this year's highs are likely. The longer term outlook for the pair remains bearish in our view. The view partly reflects our expectation that the US 'soft patch' will be over soon so that the Fed will focus once again on the improving prospects for US inflation. At the same time, we suspect that the ECB rhetoric could change yet again if the EUR gains were to persist from here.