ECB Monetary Policy Speculation Weighs on Euro US Dollar (EUR/USD) Exchange Rate

ECB Monetary Policy Speculation Weighs on Euro US Dollar (EUR/USD) Exchange Rate

The US Dollar sank lower in Asia Pacific trade as amplified existing selling pressure.

Still, many market players expect the BOJ to wait several months, and possibly many more, before tightening its policy, given the country's inflation is nowhere near its two-percent target.

A market gauge of inflation expectations closely watched by the European Central Bank, the five-year five-year forward breakeven rate, closed Wednesday at 1.765 percent, down from 1.78 percent earlier in the week.

The bank's governing council gathers as markets wait for clues from bank president Mario Draghi at a news conference on how long the ECB will continue its bond-purchase stimulus now that growth is strong.

The euro has risen by around 5% against the dollar since the beginning of the year, having already climbed 14% against the dollar during 2017.

Policy makers reiterated that they'll continue buying 30 billion euros ($37 billion) of assets a month until at least the end of September. The corresponding index is seen at 112.3 in January versus 112.5 in December. The advance came after the weekly EIA inventory data showed a drawdown in U.S. crude stockpiles for the tenth straight week. Investors are gearing up for the press conference where ECB President Mario Draghi is likely to insist on the need for monetary policy to stay accommodative until inflation nears the central bank's target of 2%.

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The dollar fell 0.52 percent against a basket of major currencies and held near three-year lows.

EURUSD (1.2436): The EURUSD extended gains to post a fresh 4-year high as price action was seen clearly rising above the 1.2300 level of resistance. Still, we would expect Draghi to emphasize that any changes to forward guidance will only be gradual and that the sequencing (rate hikes only after net QE purchases are over) is something that will not be altered.

On the other hand, if the US growth projection beats expectations it's possible the US Dollar could rebound slightly from its recent lows, leading to a rise in Fed rate hike bets.

"Measures of underlying inflation remain subdued, in part owing to special factors, and have yet to show convincing signs of a sustained upward trend". They may change their communication on the outlook for policy at the same time, according to a Bloomberg survey conducted before Thursday's meeting. Capital has fled the greenback onbets that rosy global growth willsee more central banks follow the Fed's hawkish lead, making alternatives seem relatively cheap (and thereby attractive).

"The strong cyclical momentum, the ongoing reduction of economic slack, and increasing capacity to utilization strengthened further our confidence that inflation will converge towards our inflation aim of below but close to 2 percent".

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