ECB preview – disappointment for euro bulls?

I suspect that the market may have got ahead of itself slightly with the move higher in the euro following Praet’s comments. The eurozone recovery is in place, but Italy sends a warning signal that the work is only half done. While the cracks in the eurozone have been papered over, there is still a very real sense of discontent in southern European countries. With Italy bearing the standard, those unhappy with the current system may find it easier to make their voices heard. Such tensions would inflame bond markets, requiring the ECB to maintain its role as a backstop.

As we learnt with the Federal Reserve (Fed), an end to monthly bond purchases would also not necessarily signal a complete stop to QE. The reinvestment of proceeds from the programme would continue, providing an ongoing form of monetary accommodation.

Unless the bank talks about the possibility of interest rate rises, still viewed as a very distant prospect, the euro bulls may find themselves lacking foundation for further rallies. While the QE programme is officially meant to end in September, ECB president Mario Draghi may opt to extend it to the end of the year, but at a reduced rate, perhaps €10 billion per month rather than the current €30 billion.

The lack of an explicitly hawkish commitment at this meeting could well put further downward pressure on the euro. CFTC data continues to show a reduction in net euro longs, down from their record highs in January. Without a firm move in the direction of tighter policy, the euro seems to be poised for further weakness.