Following the weak NFP report in the United States last Friday, the market moves to the key event of the week ahead – the European Central Bank (ECB) decision. The central bank already pre-committed to act in December, and most of the impact may already be priced in the market. However, it can still surprise the market, especially if we consider the strong Euro across the board.
Strong Euro Remains a Headache for the ECB
The EURUSD exchange rate reached 1.2175 ahead of the NFP report last Friday. By the time that it first reached 1.20 in the summer, the ECB verbally intervened, suggesting that the exchange rate level is too high. From that moment on, the EURUSD consolidated below 1.20, but the level eventually gave way.
At this point, the Euro rallies across the FX dashboard. Not only the EURUSD rate is higher, but the EURJPY or EURGBP too. This makes this week’s ECB decision even more interesting, as if it is to surprise markets, it may do so by delivering an ultra-dovish statement.
What Will the ECB Do?
The ECB already hinted that it would not lower the interest rate on the deposit facility more into the negative territory. It also vowed to ease more the financial conditions since most European economies are in some kind of lockdown mode.
While the decisions may already be priced in, the ECB may still surprise markets. One way of doing so is to extend the duration of policy support much more into the future than the market expects.
The ECB might also extend the Pandemic Emergency Purchase Programme (PEPP) by June 2022. While the extension is expected by the market participants, the focus will be on the actual size of the package – the higher the number, the stronger the impact on the Euro.
Finally, the ECB will likely use this press conference to deliver its concerns about the high exchange rate. If the central bank manages to surprise the markets, then the EURUSD should ease to 1.20 and below. On the other hand, any statement interpreted as less dovish should trigger a further rally in the EURUSD, especially considering that next week the Fed in the United States is expected to ease the policy too.
All in all, expect a lot of volatility on the Euro pairs this week, considering the ECB and the ongoing Brexit negotiations. Finally, the end of the year flows should have an impact on the exchange rate too.
