Shine Trader Limited reports:
The euro has risen nearly 2 percent since Aug. 20 as dovish signals from the Fed have weighed on the dollar. However, with the ECB’s interest rate decision due on Thursday and the pandemic diminishing the prospect of a hawkish ECB shift, the euro could lose momentum.
James Athey, chief investment officer at Aberdeen Asset Management said:
“Risks are skewed towards eur/USD lower as EUR/USD has been rallying and I think the ECB will exceed market expectations.”
Hawkish tendencies could also weigh on the euro, Athey said. The spread between Italian and German bunds has narrowed to about 100 basis points this week from nearly 120 basis points in May. If the ECB were to scale back its stimulus measures more quickly than expected, this risk indicator would widen again, dampening investor interest in the euro.
There are growing signs that the euro is peaking. The euro traded little changed at 1.19 against the dollar through year-end, according to the median forecast of 84 analysts. On Tuesday, the currency traded near that level.
Kit Juckes, chief currency strategist at Societe Generale in London, said the euro could trade near 1.20 against the dollar this week, its highest level since late June.
To be sure, there are still bulls. Brian Martin, senior international economist, thinks the ECB will soon scale back its bond purchases, which could help the euro rise.
So far, the ECB has insisted that any surge in consumer prices is bound to be temporary, allowing officials led by President Christine Lagarde to continue to implement stimulus measures during the pandemic. This is in stark contrast to global peers such as the Federal Reserve. The Fed has said it needs to start talking about tapering.
Jane Foley, head of foreign exchange at Rabobank, said the euro could rise if the ECB announced it would scale back its monthly asset purchases, but that was unlikely to last. She thinks Ms Lagarde may be keen to reinforce the ECB’s dovish stance and may try to avoid using the word “taper” entirely.