Euro Tipped to Fall Against Pound Sterling in Run-up to ECB Rate Meeting

• Euro to Dollar exchange rate last quote: 1.1469
• Pound to Euro exchange rate last quote: 1.1420
• Euro to Pound Sterling rate last quote: 0.8754

There is a risk the Euro could weaken in the run up to the European Central Bank's rate meeting next Thursday, and possibly afterwards.

The suggestion comes as the Euro is seen to be in a strong run against the Dollar but has relinquished ground against the British Pound.

Foreign exchange analysts at global financial services provider Nomura say they remain  “structurally” bullish on the Euro, but short-term weakness cannot be discounted.

Analysts see a steadily improving Eurozone economic outlook as providing a bulwark of support for more single currency gains but the ECB might not be happy with the recent rise in interest rates and the Euro.

Any Euro weakness stemming from the ECB's July meeting will stem from wording in the accompanying statement.

Despite changing the wording of their statement at the June meeting and removing the promise that they would cut already negative deposit rates even lower in the event of worsening monetary conditions, and despite cutting QE from 80bn a month to 60bn, the ECB’s policy is still characterised as ultra-accommodative.

Nomura expect the ECB to remove its QE easing bias at the July meeting next week.

Their “QE easing bias” states that the ECB will increase asset purchases in the event of worsening monetary conditions in the Euro-area.

They expect this to pave the way for an announcement of tapering in September.

However, although this is their base case expectation, there is a risk of the Euro weakening following the ECB meeting if the ECB retains its QE easing bias.

There may also be some weakening in the run up to the meeting due in part to the Euro having overextended higher and also due to the expectation that it will normalise now becoming embedded in the currency’s pricing.

“As we approach the ECB meeting next week we see a risk of a slowdown in EUR appreciation. Even though we expect the ECB to change its forward guidance further, we doubt the change would be a major positive surprise for the market. In contrast, no change in the forward guidance or negative comments on the recent market re-pricing from President Draghi could weaken EUR quickly,” said Nomura.

The Euro has already rapidly appreciated so Nomura see little risk-reward in holding Euro longs in the run-up.

Nevertheless, they acknowledge that overall the Eurozone is experiencing greater inflows, especially from Japanese investors and this should lead to greater gains in the longer-term.

“On top of expectations for ECB normalisation, diminishing political uncertainties have encouraged stronger foreign buying of euro area assets, even from conservative Japanese investors,” said Nomura.

Their short-term negative ‘bet’ is more a twist and turn rather than a trend call, and overall they are looking for better entry levels for Euro longs.