EUR to strengthen further if ECB disappoints easing expectations

Analysts at MUFG Bank, point out that the euro could appreciate if the European Central Bank (ECB) does not deliver easing measures.

Key Quotes:

“The next key resistance level is provided by the intraday high from the 25th June 2019 at 1.1412. There is clearly a heightened risk that the EUR’s rebound will extend in the near-term driven by the liquidation of funding positions with more-risk-averse trading conditions likely to continue.”

“The sharp strengthening of the EUR is an unhelpful development for the ECB which will further dampen their outlook for inflation if it proves persistent. It comes at a time when downside risks for growth in the euro-zone have increased significantly in response to the coronavirus-related disruption. The negative shock could tip the euro-zone economy into recession in the coming quarters with the Italian and German economies judged as most exposed. The Italian government has stated that it will double the amount of planned fiscal stimulus to EUR7.5 billion to combat economic disruption which already includes a nationwide school closure and a ban on public events. We expect other national government in the euro-zone to follow with looser fiscal policy, but pressure still remains on the ECB to act.”

“The ECB is under pressure to deliver a package of easing measures in the week ahead both in response to significant downside risks to the euro-zone growth outlook from the virus and the sharp strengthening of the EUR. After the Fed’s aggressive response, there is a clear risk that the EUR will strengthen further if the ECB disappoints expectations next week. Pushing rates deeper into negative territory could prove more effective at dampening upward pressure on the EUR. However, the ECB may still struggle to reverse the strengthening EUR trend in the near-term.”

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