After rising to a 1 year high of 1.1490, EUR/USD struggled to extend its gains above 1.15. Investors worry that Mario Draghi will disappoint in the same way as Janet Yellen. Draghi’s comments last month took euro to a 1 year high versus the U.S. dollar and now everyone will be tuning into the ECB press conference to see whether his hawkishness is repeated or downplayed. In June, Draghi caught the market by surprise when he said, “the threat of deflation is gone and reflationary forces are at play” and indicated that they could change their policy stance from accommodative to unchanged. However a day later, the “ECB” said the market misjudged Draghi’s comments and on Thursday ECB member Rimsevics said will continue for a few years as forecasts are still far the central bank’s goals. To confuse things further, the Wall Street Journal said Draghi will talk about reducing their bond buying program at the Jackson Hole summit next month. These conflicting comments will discourage investors from taking on large positions ahead of the rate decision.
We believe that the European has already set the course for their next policy change. Its no secret that they prefer to prepare the market for major changes and that is exactly what they are doing now. The ECB is getting ready to taper, or reduce bond buying and Draghi will most likely use next week’s meeting as a platform to reinforce those plans. Eurozone data has been healthy with retail sales, manufacturing and service sector activity improving across the region. is a bit of a problem but stronger economic activity should naturally lead to higher prices. The only problem is the currency, which is up 8.5% year to date and the appreciation over the past month hurts and export activity. With that in mind, we expect EUR/USD to test and possibly break 1.15 on Draghi’s optimism.
European policy meeting
The European Central Bank's latest interest rate decision is due at 1145GMT (7:45AM ET) on Thursday, with no big changes expected.
Most of the focus will be on President Mario Draghi's press conference 45 minutes after the announcement, as investors look for more clues on when and how the ECB could scale back its massive quantitative easing program.
Market experts believe the is likely to wait until September before announcing a tapering of its 60 billion euros of monthly asset purchases.
Besides the ECB, market participants will be focusing on Tuesday's ZEW survey data on German economic sentiment to gauge confidence in the euro zone's largest economy.