There is a lot at stake today as the European Central Bank meets to revise its monetary policy. The single currency has been trading with a strong positive bias for several weeks as investors widely anticipate the end of ultra-accommodative monetary policy for the euro area. EUR/USD hit 1.1583 on Tuesday as speculators continued to raise euro bullish bets. This morning, the single currency has been treading water at around 1.15 ahead of Mario Draghi’s press conference.
Market participants are positioned for a hawkish tone from the ECB president as they bet he will drop hints on tapering. Even though the ECB cannot walk out of this meeting without giving a little clarity, at least, we think that the ECB won’t match the market’s hawkish expectations. Indeed, it is true that the euro area has gained momentum recently, allowing for a more enthusiastic tone regarding growth expectations. However, those improvements have failed to translate into strong inflationary pressure for now. Therefore, we anticipate the ECB will move extremely slowly towards tapering and most importantly, more slowly than the Fed as it seek to prevent further EUR strength.
All in all, we believe that the risk is mostly on the downside in EUR crosses as investors are positioned for a hawkish surprise. EUR/USD is particularly vulnerable and a reversal towards 1.12 is more than likely.
By Arnaud Masset