Euro May Rise on Neutral ECB, Pound at Risk on Carney Comments

The Euro may rise as the ECB withholds dovish rhetoric at the bank’s policy meeting. The Pound is at risk as future BOE chief Mark Carney hints at further easing ahead.

Talking Points

• Euro May Rise as ECB’s Draghi Holds Back Dovish Commentary
• British Pound May Fall as Carney Hints at Renewed Easing Ahead
• EU Leaders Summit May Fuel Debt Crisis Stress on Budget Impasse

The economic calendar heats up in European trading hours. The European Central Bank will deliver its monthly policy announcement. Mario Draghi and company are not expected to offer any changes to the current framework this time around but the markets appear see the possibility for some verbal intervention to emerge in the press conference following the rate decision to talk down the recently buoyant Euro. The ECB President seems unlikely to overstep the bank’s mandate and dip into exchange rate policy however. Indeed, a strong currency and its negative implications for exports and broader economic growth ultimately falls outside of the ECB’s strict focus on price stability alone. Still, expectant markets primed for a dovish turn in rhetoric may respond to its absence as de-facto hawkish and bid up the single currency.

Meanwhile, EU Leaders will gather for a two-day summit in Brussels to hash out a compromise on a seven-year budget for the regional bloc. Familiar UK-French frictions have re-emerged and may have passed with little fanfare if not for the Eurozone debt crisis. Indeed, passing a budget is critical to secure funding for ongoing bailout efforts and traders may interpret continued deadlock as negative for sovereign risk, particularly in the context of recent jitters elsewhere on the political front. A clear-cut reaction may have to wait until after the ECB rate decision however, with traders unlikely to commit to a directional bias until after Draghi remarks have had their chance to filter into exchange rates.

The Bank of England is likewise due to deliver an update on its monetary stance. The policy mix is likely to remain unchanged here as well, shifting the focus to BOE Governor-Designate Mark Carney instead as he answers questions before the Treasury Select Committee. Lawmakers are expected to grill the incoming central bank chief about the monetary policy tools he is likely to use to help the UK escape a looming triple-dip recession. The current head of the Bank of Canada has stuck a strongly dovish tone in prior commentary; more of the same this time around is likely to weigh on British Pound and we continue to hold short GBPUSD.

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Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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