Euro exchange rate today: The EUR positive and negatives to look out for at today's ECB get-together

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Category: Exchange Rates

Published on Thursday, 02 August 2012 08:44

Written by Sam Coventry

"We think concrete measures are more likely at the September meeting" - Guillermo Felices at Barclays.

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The euro (Currency:EUR) is looking increasingly bullish as we head towards today's ECB policy announcement.

The euro dollar exchange rate is 0.3 pct in the blue at 1.2261 at 9:30 AM in London.

The euro pound exchange rate is 0.26 pct higher at 0.7891.


Beware though, surprises could be sprung, and with the single currency having gained leading into the meeting the chance for a downward correction looks increasingly likely.

Barcalys analyst Guillermo Felices says that should a LTRO and 25bp refi rate cut be announced then the effect would be negative on the EUR but a positive one on risk appetite.

Should an SMP be announced, assuming it is sterilised, this would be positive for risk and the EUR because it would reduce its risk premium suggests Felices. (SMP -  Securities Markets Programme whereby the ECB purchases government bonds).

That said, the downside risk to the euro dollar exchange rate, and by extension the euro pound exchange rate, increases should the Bank do nothing at all.

Indeed, this is the base case at Barclays where Felices says:

"The ECB will not announce any significant policy change. Rather, we think it likely that President Draghi's statement will signal that they are ready to act, using a range of tools at their disposal, if conditions deemed it necessary. We think concrete measures are more likely at the September meeting."

Accordingly, such a lack of action would disappoint markets, leading to a sell-off in risky assets and EUR/USD.

"It is possible that the rally since last Thursday is not fully reversed as the ECB President will keep verbal intervention active, but eventually markets may test the resolve of the ECB to do "whatever it takes" even before the September meeting. Assuming no major news from the FOMC tonight, we would express these views by being tactically short EUR/USD and long volatility ahead of the ECB meeting," says Felices.