Euro Faces Upside Risk as ECB to Hold and U.S. Jobs Report Looms

No change expected at Thursday's ECB meeting in Vienna

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The euro faces upside risks heading into the European Central Bank rate decision on Thursday, with President Mario Draghi and his fellow officials expected to keep monetary policy unchanged, analysts say.

The common currency will be driven mostly by expectations for the Federal Reserve’s next policy step, spurring greater scrutiny on U.S. non-farm payrolls data due a day after the ECB’s decision.

Bank of America Merrill Lynch

With the ECB in stasis for now, the burden of proof for further euro weakness continues to fall on the Federal Reserve, Athanasios Vamvakidis, head of G-10 foreign-exchange strategy, writes in a note to clients. Flow data also suggest there has been little pre-positioning among investors ahead of this week’s meeting, he adds.

Bank of America’s base case is for no change in ECB policy, particularly ahead of the start of the corporate sector purchase program and another round of targeted long-term loans, or TLTROs, Vamvakidis says. These policies afford ECB time to assess the measures’ impact on the real economy before deciding whether further measures are needed after summer, he adds.

Vamvakidis says he expects more gains in U.S. dollar, albeit modest, through the third quarter as the Fed tightens policy once more in September.


Swings in the euro could be limited this week, strategist Josh O’Byrne says in an interview. The expectations for the meeting are low as any signals on rates and the quantitative-easing program should be absent. There will probably be a debate over scope to signal the inclusion of Greek debt in the purchases program, he adds.

Morgan Stanley

The euro should remain fairly range-bound against the U.S. dollar as the ECB rate decision is unlikely to impact the currency significantly, strategists including Hans Redeker write in a note to clients.

The inflation and growth projections could be revised upward due to the higher oil prices, though this is unlikely to impact euro meaningfully, they add. Markets are only pricing a 5-basis-point rate cut this year, and ECB has made it clear that further rate cuts are unlikely. The yield differentials affecting the euro will continue to be driven by the Federal Reserve, according to the analysts.

BNP Paribas

There is little pressure on the ECB to act now, with activity having picked up in first quarter, inflation expectations rising, and the euro’s effective rate currently stable, strategists including Daniel Katzive write in a note to clients.

The euro may bounce against the U.S. dollar in the near term as the pair looks oversold and the Federal Reserve is unlikely to raise rates in June. The currency pair may rise considerably toward BNP’s mid-year forecast of 1.16, the strategists write.

The ECB hold policy also means upside risk for the euro against the yen, as the Bank of Japan will probably be the next Group-of-10 central bank to ease, BNP strategists say, adding that they favor long euro positions against Japanese currency heading into the summer.

Credit Agricole

The ECB meeting should discourage further selling of euros, strategists Valentin Marinov and Manuel Oliveri write in a note to clients. The meeting is likely to strengthen the market’s perception that the central bank is no longer an active participant in the global currency war, as it prefers to stimulate growth and inflation through the euro zone’s lending channel, they add.

Brown Brothers Harriman

The market view that ECB rates have bottomed may be positive for euro, global head of currency strategy Marc Chandler says in an interview.

The ECB meeting is not key to the direction of the currency going forward, with U.S. jobs data due the next day seen as more important, he adds. The main focus on Thursday will be on the details of corporate-bond purchases and TLTROs, along with the new forecasts, and any chance that the ECB will allow Greek bonds to be used as collateral, Chandler says.


The Federal Reserve is reviving the “divergence trade,” with euro weakness being a result of medium-term restrictive Fed policy and expansionary ECB measures, strategists including Ulrich Leuchtmann write in a note to clients.

The Fed’s signals are more volatile than ever, he adds, and the medium-term euro outlook is subject to change more quickly than usual. Commerzbank expects the U.S. central bank to raise rates in June or July and sees euro at 1.10 against the U.S. dollar in the second quarter.

Nordea Markets

Holding light positions into the ECB meeting and U.S. jobs data is the favored strategy, strategist Aurelija Augulyte says in an interview. Long positions on the euro against the U.S. dollar are attractive as the ECB could adjust its inflation forecast higher, while a rate increase from Federal Reserve this summer is already priced by markets, she adds.

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