EUR/USD: Risks titled to the downside as the stage is set for an important week for the euro – MUFG

The pullback for the US dollar has helped to lift EUR/USD back above the 1.01-level after it failed to break decisively below parity last week. As economists at MUFG Bank note, it isn important week for European Central Bank (ECB) policy and Italian politics.

An important week for the EUR

“It is an important policy meeting for ECB as they are expected to begin raising rates for the first time since July 2011. At the same time, market participants are eagerly awaiting details of the ECB’s plans for a new anti-fragmentation policy tool. It is of crucial importance that details of the new tool convince market participants that the ECB can help to keep a lid on fragmentation risk. The last thing that the eurozone needs right now on top of the ongoing negative shock from the Ukraine conflict is a further blow out in peripheral spreads that would reinforce downside risks to growth.”

“The developments have increased the risk of an early election in Italy. A further increase in political uncertainty would result in tighter financial conditions and disrupt efforts to pass the budget and economic reforms needed to access EU Recovery Funds. We still believe risks remain titled to the downside for the euro.”