The Euro is Vulnerable to Weakness at Thursday's ECB Meeting

You would be forgiven for thinking there is only one item on the agenda this week - the UK General Election.

But there could be some notable volatility across the Euro strip as Thursday also brings a pivotal meeting for the Euro at the European Central Bank.

The ECB meets to deliver their latest assessments on the Eurozone economy and the give guidance as to where they see policy moving in the future.

Of interest to markets will be whether or not the ECB now believes it is time to consider raising interest rates and squeezing back its gargantuan programme of printing money to buy corporate and government debt.

The Euro has rallied sharply over recent weeks against the Pound, Dollar and other major currencies in anticipation of such a shift in attitude at the ECB.

In fact, the Euro is seen as the best-performing currency amongst the world’s ten largest currencies for 2017.

Inevitably, when expectations grow in such a manner, disappointment becomes a substantial risk.

“We think the EUR is vulnerable into next Thursday’s ECB meeting,” say foreign currency strategists with BNP Paribas. “Bullish EUR momentum remains strong, but we think that the market’s expectations for a hawkish ECB meeting Thursday as likely overdone.”

At the meeting, analysts expect risks to growth to be described as ‘balanced’ but them to reiterate that inflation has not showed the same improvement, particularly following the softer than expected readings over the past few months.

Furthermore, the ECB will be very reluctant to further tighten financial conditions, which have already tightened since their March meeting, thanks to rising bond yields and a stronger Euro.

“Although continued inflows into eurozone equities may continue to support the EUR (for more see here), our equity derivative strategy team flag the very extended period of equity rallies without large pullbacks and suggest buying protection,” say BNP Paribas.

Meanwhile, EUR long positioning remains at one of the most extended levels in the past 5 years according to BNP Paribas FX Positioning Analysis. This suggests the prospect of a big corrective move lower is increasingly likely

Furthermore, analysis from BNP Paribas suggests EURUSD is richly valued with a more appropriate valuation on the exchange rate seen at 1.1048.

Regarding the Euro to Pound Sterling exchange rate (EUR/GBP), analysts at the French bank will be keeping an eye on the UK elections noting GBP short positions have largely been unwound which should allow for big directional moves in the currency to occur once more.

“In the short term, a Labour victory, particularly a coalition, would be most negative for the currency,” say BNP Paribas.

Consensus currently has it that a strong Conservative majority is what the Pound needs to move back towards the top of recent ranges.