Monex: EURUSD slightly higher ahead of key ECB policy meeting

9 september 2021

EURUSD heading slightly higher ahead of key ECB policy meeting this afternoon. The following is a short commentary in English from Ima Sammani, Currency Analyst at Monex Europe on the US dollar, the euro and the British pound.

EUR

Markets are all prepped for the European Central Bank’s monetary policy decision today, and expectations are high for it to be a more exciting meeting than any of the previous ones over the last half year. After the central bank pledged in March to keep asset purchases through the Pandemic Emergency Purchase Programme 'significantly higher' than previously, markets think now is the time the ECB will cut back on purchases, although they will likely continue to thread carefully.

With the expiry of PEPP being around the corner, the ECB has few options to avoid a cliff-edge effect occurring in markets without either reducing its asset purchases gradually in Q4 already, or extending the PEPP envelope beyond the current expiry date of March 2022.

Hawkish comments from ECB members over the last couple of weeks acknowledging the series of strong data from the eurozone over the summer and the improved outlook support the first view, although any reduction in purchases should be paired with a continued dovish tone and emphasis on the flexibility of PEPP.

By focusing on the flexibility of the programme, the ECB can reassure markets that should conditions deteriorate, the central bank is ready to step in and adjust purchases accordingly. This would help turn today’s arguably more hawkish decision into a dovish disguise. If delivered in this manner, it could put a lid on extensive euro gains in today’s session.

Additionally, if the ECB opts for a gradual reduction in asset purchases, this reduction will be minor compared to the € 120bn a month of total purchases, and should keep financing conditions loose given the already high amounts. As always, the decision will be announced at 13:45 CET and is followed by a press conference at 14:30 CET.

USD

The dollar remained fairly well bid in yesterday’s trading session, despite the previous driver of higher US yields reversing. This time around, a decline in US equity indices provided the stimulus for the dollar’s haven bid as inflation and growth fears remain prominent in global investors’ minds.

Yesterday’s hawkish comments by Dallas Fed President Robert Kaplan further underpinned the dollar as he stated that strong data supports the case for unveiling a Fed tapering plan this month, and added that the implementation should begin 'shortly after, maybe in October'.

His comments come after Fed Chair Jerome Powell’s dovish speech at the Jackson Hole symposium where he implied policy will remain loose for longer, which weighed on the dollar back then. With Kaplan being a known hawk at the Fed, it is likely that the decline in equities proved more pivotal for the USD strength yesterday than Kaplan’s comments around policy normalisation.

GBP

Amid broad USD strength, the pound remained weighed down with little idiosyncratic drivers to buffer the broader trend. Speaking in front of a select committee yesterday, Bank of England Governor Andrew Bailey said it's reasonable to assume that interest rates will be rising in the next few years.

The generic commentary by BoE members did little for financial markets though as traders are already accustomed to the idea of further monetary tightening by the BoE. Again the data calendar is light today for the UK, leaving the pound at the mercy of broader US dollar dynamics, while the ECB’s decision this afternoon is likely to be impactful for GBPEUR.