The ECB: Still a driver of EURUSD?
This week will see the ECB deliver its latest monetary policy decision. Partly down to the role that the ECB has carved for itself, but more likely due to the volatility induced by Trump’s current administration, the significance of such events to key currency crosses is rightfully being questioned. Currency markets have remained remarkably unperturbed by the latest talk on tariffs. The President has confirmed the tariffs, due to come into force on Canadian and Mexican goods entering the US from today, will go ahead. It seems, at least for now, no 11th hour extensions will be granted.
A significant sell-off in equity indices has not been coupled with a rally in the Dollar as we might expect. The relevance of the ECB’s Thursday decision is being limited thanks to the distraction caused by such tariff developments. However, there are scenarios that could move the needle following Thursday’s decision. A 25-basis point cut from the ECB is fully priced in. Once delivered that will take the deposit rate to 2.5% in the Eurozone. It is only beyond this March meeting where the path for ECB rates becomes indecisive. Adjustments to forward guidance and market positioning therefore could induce market movement.
The biggest signal that the ECB’s current easing cycle is slowing would be the policy statement dropping reference to ‘restrictive’ policy. Each decision in this cycle has contained a prompt reference to ‘restrictive financing conditions’. If the ECB were to drop such language from its forthcoming publication this week it would send the signal that the central bank now considers the progress it has made sufficient to render current monetary policy non-restrictive. This would in turn send a signal about the requirements in the eyes of the ECB for future cuts and likely support the Euro. Conversely, retaining such language with deposit rates at just 2% could weaken the Euro and bolster expectations for further cuts from April onwards.
Discussion and Analysis by Charles Porter
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