EUR/USD Rate Confirms Floor has Been Found, Gains to be Limited Ahead of ECB Meeting

The EUR has recently depreciated versus the USD but with the European Central Bank meeting due this week that trend lower could be questioned.

The euro has crossed back above the 1.13 marker against the US dollar once more as a strong set of data out of Germany boost enthusiasm for the common currency.

The closely watched ZEW index of expectations for future growth climbed for the second consecutive month to 11.2 in April, up from 4.3 in March and ahead of economists’ forecasts of a more moderate rise to 8.

The data confirms ecnomic sentiment in Germany is on the way up; and as would be expected the EUR to USD conversion has benefitted moving above the 1.13 line to reach 1.1333 at the time of writing.

Interestingly, the pound sterling appears to have been an even bigger beneficiary of the German data, as noted here. This is due to the UK currency's strong correlation with risk sentiment.

When European stock markets rise, so too does sterling, a scenario that has allowed it to profit notably on the back of strong Eurozone data.

Dollar Won't Let the Euro Run Away Ahead of Thursday's ECB Meeting

All eyes will now be on Thursday’s ECB governing council meeting which should set the tone for the shared currency over the remainder of the month.  

While we are expecting no change in policy, as the central bank looks to judge the effects of the aggressive package introduced in March, the press conference by ECB President Draghi should be closely watched.

Looking ahead, this near-term downtrend is forecast to remain limited by analyst Andreas Hürkamp at Commerzbank who says uncertainty regarding the further course of action by the ECB and the Fed remains high.

One reason being due to a general USD rally after the US currency had traded much weaker recently on the back of the more dovish Fed.

“But an extremely cautious Fed approach has now been priced in sufficiently. Moreover, several Federal Reserve Open Markets Committee members have struck a somewhat more optimistic tone of late,” says Hürkamp.

For example, Philadelphia Federal Reserve President Patrick Harker and San Francisco Federal Reserve President John Williams see a real possibility of up to three rate moves in the course of this year.

Further EUR/USD weakness is thus possible on account of the dollar's recent sell-off ending courtesy of a changing tone from the Fed. 

But the EUR also has domestic economic developments to blame for EUR/USD’s recent weakness.

“Against the backdrop of the disappointing development of inflation expectations in the Eurozone, the ECB will probably signal that it is still highly willing to take additional expansionary measures,” says Hürkamp.

In this context Hürkamp believes it is likely that ECB President Mario Draghi will make it clear that the ECB could indeed lower its interest rates further.

Draghi will feel he has cause to clarify his position, particularly following the last meeting where his comments on the outlook for Eurozone interest rates were interpreted differently by the market, which caused the EUR to appreciate.

“Although Draghi will surely deny that the package of measures adopted in March aimed to weaken the EUR exchange rate, the fact cannot be dismissed that the stronger EUR is not conducive to the ECB’s inflation efforts,” says Hürkamp.

Therefore, the market reaction seen at the time can hardly have been desirable.

It is worth pointing out though that although EUR-USD has risen by 2.3% since the previous ECB meeting (3.6% YTD), the TW exchange rate is up by a more-modest 1.0% (1.9% YTD).

This is due to the fact that, so far, the currency market has been dominated by the USD-weakness story, but it is relevant for the central bank as it is the Trade-Weighted index that matters most for international trade and therefore to inflation via the price of imports.

Thus it is a valid point that the ECB may not actively talk down the value of the euro.

Euro’s Downside Seen as Limited

The downside potential in EUR-USD remains limited near-term argue Commerzbank noting most market participants may remain sceptical as to whether the ECB can still ease its monetary policy at all.

“At the same time, they will not count on an imminent rate hike by the US Fed as long as they get no unambiguous signal from the Fed officials, for example in the statement after the next meeting on 26/27 April,” says Hürkamp.

The pair therefore looks set to maintain its recent technical ranges that are capped by 1.1450 to the top and 1.1250 at the bottom.