The euro could strengthen should ECB president Mario Draghi stick tomorrow to indications that monetary policy could be tightened next year, just as the US central bank’s interest-rate path is thrown into doubt.
Against the dollar, the euro is benefiting from broad dollar weakness as traders question whether the US Federal Reserve will continue to raise rates next year. The euro could rally if Mr Draghi signals tomorrow that at least one increase in 2019 is still on the ECB’s radar. Still, money markets suggest that the first hike in the deposit rate since 2011 will not happen next year.
The ECB is set to cap its asset-purchase programme at €2.6 trillion by the end of this month but has yet to announce how it will reinvest proceeds from maturing bonds. With benchmark German bond yields hovering close to year-to-date lows, any signs of hawkishness could see them climb from around 0.27% currently.
Toronto Dominion Bank head of foreign-exchange strategy, Ned Rumpeltin, said that “confirmation that Draghi is sticking to his plan would be euro positive”, while strategist Valentin Marinov at Credit Agricole said that “the ECB will face a reality check of its policy normalisation plans and forward guidance” amid weak data and low oil prices. “That said, we expect the ECB to stick to its plans and keep its forward guidance little changed, given that it has reached the limits of its easing policy and that some of the economic and political risks should start to abate from here,” possibly helping the euro recover against the dollar, Credit Agricole said.
The ECB may open an upside for the euro because the strong wage figures for the third quarter across the eurozone should have provided comfort to the ECB that underlying inflation pressures are picking up and keep it on track to gradually normalise policy, said strategist Lee Hardman at MUFG.
“If the ECB proves less dovish than expected, it could open up further upside for the euro” toward $1.15, he said. And at Barclays, strategists Cagdas Aksu and Max Kitson said a lot of dovishness was already priced into the currency. “We expect the governing council to telegraph a cautiously confident tone,” they said.