Euro Forecast: Markets Wait for ECB Policy Decision

Several central banks will make their policy decisions this week, but the European Central Bank will take the center stage as it should announce changes to its extraordinary stimulus program.

The ECB officials signaled that they will discuss adjustments to the asset purchase program at the meeting on October 26. It is widely expected that the central bank will trim the size of monthly purchases to â‚¬30 billion from the current €60 billion. At the same time, it is expected that the ECB will extend the program by six to nine months starting from January (currently, it should end in December). Discussion of an interest rate hike is highly unlikely, and most analysts do not expect that to happen in the foreseeable future, though some believe that a rate lift-off may begin by the end of 2018. The ECB tries to be cautious and avoid riling up markets, therefore significant surprises are not expected. With that said, market participants will closely watch any nuances in wording of the policy statement and the speech at the press conference that will follow the meeting. Depending on interpretations of the words, markets can push the euro either up or down.

As for this week’s economic data, a bunch of Purchasing Managers’ Indices will be released on Tuesday. The following day, on Wednesday, the German Ifo Business Climate will come out. Economists expect that most of the indicators will be almost unchanged.

Outside of normal events, the Catalan crisis continued to unfold as the Spanish government decided to take a direct control over Catalonia to prevent the region’s secession. But the crisis, however threatening it may look for the stability of the European Union, has had little impact on the currency market so far. That made market analysts to believe that news from Spain will affect the euro very little if at all.

Analysts preferred to be neutral in their forecasts for the euro, reflecting the neutral stance of the European Central Bank as well as uncertainty about the impact of the ECB policy decision on the currency.

Forex Crunch wrote:

The ECB may have created expectations for a significant tapering only to go more slowly. It is important to remember that Draghi wants a weaker euro and may act to achieve his goal by setting expectations. The crisis in Catalonia kept the euro a bit lower within the range, and it could rise now. However, the US has its own issues and EUR/USD is quite a stubborn currency pair, refusing to fall.

DailyFX noted:

The ECB will want to avoid surprising the markets – which is why our forecast for the Euro is neutral – but, as always, the devil will be in the detail.

The euro started the week in line with the neutral forecasts, trading basically flat near the opening level of 1.1764.

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