Big ECB Day Ahead – What to Expect for Euro

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Big ECB Day Ahead – What to Expect for Euro

Daily FX Market Roundup 03.10.2021

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

The U.S. dollar traded lower against most of the major currencies on Wednesday. According to the latest report, inflationary pressures are on the rise but not as quickly as investors feared. U.S. consumer prices grew 0.4% in the month of February, which was in line with expectations. Core prices on the other hand rose only 0.1% against 0.2% forecast. Going into this report, U.S. dollar traders were positioned for a strong number and when they saw the muted report, they took the greenback lower against most of the major currencies. Although prices are expected to rise further in March, for now, inflationary concerns eased somewhat, allowing yields to decline and the Dow Jones Industrial Average to power to new highs. Of course, investors were also pleased to see the House pass the $1.9 trillion stimulus package. President Biden is expected to sign the bill on Friday and the Treasury could start sending out $1,400 stimulus checks within days. Stocks could extend their gains as investors look forward to the positive implications of this latest economic relief bill.

The Swiss Franc was the only that did not benefit from U.S. dollar weakness. Much of that had to do with the Swiss National Bank’s endorsement of a weaker currency. According to Vice Chair Zurbruegg, “We are convinced that our expansive monetary policy with a negative interest rate of minus 0.75% and interventions in the foreign currency market is necessary, to maintain the appropriate conditions for the Swiss economy.” He also added “We can go further with both instruments, if the situation requires it.”

Meanwhile the Bank of Canada’s decision to leave monetary policy unchanged was widely anticipated. Consumers and businesses are adapting to containment measures, and housing market activity has been much stronger than expected according to the short monetary policy statement. However “The labour market is a long way from recovery, with employment still well below pre-COVID levels and…..the spread of more transmissible variants of the virus poses the largest downside risk to activity, as localized outbreaks and restrictions could restrain growth and add choppiness to the recovery.” The central bank will continue their quantitative easing program but the Canadian dollar traded higher as the statement was laced with optimism.

The focus turns to the European Central Bank’s monetary policy announcement. In many ways, the ECB rate decision is this week’s biggest event risk. Not only will we hear from ECB President Lagarde but economic projections will also be updated. Here are the few things we know – vaccine rollout in the Eurozone is slower than the U.S., more restrictions remain in place, the currency is strong and the ECB is more concerned about the rise in yields than the Federal Reserve. Economic data has been mixed and the Eurozone would be lucky to escape contraction in the first quarter. With that said, the global economy is recovering, more people are getting vaccinated with each passing day and the outlook is bright. So the big question for the ECB tomorrow is whether they will look past near term uncertainties. If they put more emphasis on market volatility and increases bond purchases, EUR/USD will fall to fresh lows. However if they maintain an air of optimism and suggest that any move taken will not be followed by further action, EUR/USD could return to 1.20.

Kathy Lien
Managing Director

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