The European Central Bank meets next Thursday but the euro was already weakening last week as weak data, in particularly inflation reports, prompted speculation of rate cuts.
While some of the move in the euro/dollar, as discussed recently, was also dollar strength with the FOMC being seen as slightly less dovish, this week the focus is solely the ECB. Don’t expect huge changes in policy. ECB President Mario Draghi may drop some interesting comments into the mix with respect to another Long-Term Refinancing Operating but even that is not so likely. The euro zone economy is recovering if not fast enough for anyone’s liking. At the very least it is not slipping back into recession.
As with the U.S. central bank, euro zone investors are even starting to think about some paring back of the extraordinary stimulus measures put in place during the Great Recession. No one wants to act too soon but neither does anyone want to get caught with huge amounts of stimulus still on the books when momentum builds. Yet Draghi is unlikely to talk about the euro zone equivalent of tapering given any euro weakening is probably to their liking, all of which is likely to leave investors with a very neutral meeting.
The euro gained 8.4 percent from the low in July to the peak in October. Then it lost 2.4 percent last week alone. (1.3832 to 1.3500) There may be some volatility making it hard for short term plays but equally sitting on the sidelines is unlikely to see one sitting on the wrong side of the trade. Perhaps, in the case of the euro/dollar it is just better to wait for more clarity in one currency or another.