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Euro Upside Possible As ECB Policy Tightening Comes Closer

Euro Upside Possible As ECB Policy Tightening Comes Closer

2017-04-26 10:34:00
Martin Essex, MSTA, Analyst
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Talking Points

- The Euro has so far failed to respond strongly to a report Tuesday suggesting the ECB is moving towards an eventual tapering of its monetary stimulus program.

- That could be about to change, with a more substantial rise in the currency now on the cards.

- Check out the DailyFX Economic Calendar and see what live coverage of key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

Since its jump higher on the market-friendly result of Sunday’s French presidential election first round, the Euro has barely moved, and that’s a surprise. As we reported here, a Reuters report Tuesday suggested that the European Central Bank is moving closer – albeit glacially slowly – towards withdrawing some of its monetary stimulus.

The surprise is that a tightening of monetary policy – known in the markets as a “tapering” of the ECB’s stimulus program – should mean a firmer Euro, and the signs are that could yet be on the way. The first thing to watch out for is any communication tweaks from ECB President Mario Draghi in his press conference Thursday after the meeting of the ECB Governing Council in Frankfurt.

The chances of a policy change this week are effectively zero, but what Draghi could do is pave the way for a shift in the central bank’s forward guidance at the following meeting on June 8 in Tallinn, Estonia. The latest ECB staff macroeconomic projections for the Euro-Zone will also be published then, and the ECB is more likely to signal a shift in policy at meetings where those are published than those where they aren’t.

This does not mean an actual policy change is coming soon, and 2018 still seems more likely than 2017 but it’s still remarkable that the Euro has so far shown so little reaction when the tiniest of policy hints can often lead to sharp currency moves.

Chart: EUR/USD One-Hour Timeframe (April 21-26, 2017)

Euro Upside Possible As ECB Policy Tightening Comes Closer

Chart by IG

The Euro has also been essentially stable against the British Pound, while a climb against the Japanese Yen has been largely a reflection of Yen weakness as a broadly optimistic market mood has lessened the attractions of haven currencies like Japan’s.

Note too that IG Client Sentiment data show that 69% of traders are currently net short, compared with 31% netlong and the ratio of traders short to long at 2.23 to 1. At DailyFX, we typically take a contrarian view to crowd sentiment, and the fact traders are netshort gives us a stronger EURUSD-bullish contrarian trading bias.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

Why and how do we use IG Client Sentiment in trading? See our guide.

If you’re looking for trading ideas, check out our trading guides; they’re free and updated for the second quarter of 2017.

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