The key event risk for EUR this week is today’s ECB meeting. We and the market expect no new policy announcements from the ECB following the aggressive easing packaged announced in June. Thus we suspect the event will be a non-event.
If anything, the market will focus on Draghi’s assessment of the Eurozone’s macro outlook and it is also likely that Draghi provides more details about the recently announced policy measures. It will also be interesting to see if Draghi comments on EUR’s resilience after EUR has retraced all of the post-ECB losses.
We think EUR’s resilience is likely a function of market positioning, technical support and the markets lack of faith that the announced policy measures will be enough to boost euro zone inflationary pressures.
There are two risks to this generally benign scenario.
First, the ECB could hint that QE is a policy option in H2 2014. This would be a big surprise and could see a sharp move lower in EUR.
Second, the ECB could try to jawbone EUR lower.
That said, given the market is still short EUR and the spread between the Fed and the ECB balance sheet (% of GDP) is unlikely to shift anytime soon, we look for EUR to squeeze higher over the rest of the week. We target a move to 1.3710.
CA