Euro: Will ECB follow in footsteps of BoC?

Thursday’s European Central Bank monetary policy announcement is one of the most important event risks this week. With a seven week gap between tomorrow’s meeting and the next, the ECB has one of two choices – they can take this opportunity to clarify their forward guidance or they could keep their assessment unchanged and bide their time until there is clearer evidence that European nations have gotten the third virus wave under control.  

The Bank of Canada chose the former. They left interest rates unchanged but tapered asset purchases by 1 billion and drew forward their rate hike forecast.  Previously the central bank did not expect to raise rates before 2023 and now they see no rate hike until the second half of 2022. Like the Eurozone, Canada is experiencing sharp rises in COVID-19 cases with stay at home measures in many provinces. However with a strong local jobs market and the U.S. economy recovering quickly, the BoC believed that the COVID-19 pandemic would be less detrimental to economy’s output than previously expected. They now see the economy growing 6.5% this year, up from a prior forecast of 4%. The Canadian dollar soared after the rate decision with USD/CAD dropping more than 150 pips intraday.

The Canadian dollar’s reaction to the BoC announcement could be precursor of what euro trades can expect tomorrow. From a data perspective, most economic reports haven’t been terrible. The Eurozone economy fared better than analysts anticipated despite widespread lockdowns A contraction is expected for many Eurozone nations this quarter but judging from the rally in the euro this month, investors are not worried about a lasting impact. They shrugged off weaker German ZEW and IFO reports and could do the same with April PMIs which are scheduled for release on Friday. We saw this last summer when the prospect of a recovery drove EUR/USD higher before restrictions were eased. 

Euro traders are usually very forward looking and while the region’s vaccination rate lags far behind the U.S. and U.K, every day more and more of their population is getting vaccinated. The European Union resumed its usage of the Johnson & Johnson vaccine which should speed up the process. Europe is basically 4 to 6 weeks behind the U.S. which means it is only a matter of time before their recoveries gain momentum. The ECB knows this and the big question tomorrow is whether they will acknowledge it. If the ECB expresses the same optimism as the BoC EUR/USD could make a run for 1.21. If they remain cautious and suggest that stimulus could increase, EUR/USD could test 1.19 with more significant losses for euro against the crosses.