Given the uncertainty around inflation and the war in Ukraine, the ECB may find it is unable to do much to alter its policy outlook.
What to expect from the ECB meeting
It seems each European Central Bank (ECB) meeting finds the bank confronting more difficult circumstances than the last. No policy changes are expected, but with inflation still rampant and the war in Ukraine having a significant effect on the eurozone economy. The latter’s impact is still hard to discern, so the bank will not wish to rush into making forecasts without sufficient information.
It looks like the best course is to stick to its plan and stated view that interest rate increases will only come after the end of the asset purchase programme (APP). The APP is still to be wound down, with an end date sometime after June expected.
What do markets think will happen?
Current pricing points towards around 115 basis points (bps) of rate increases over the next twelve months, according to Reuters polls. Anything more than this is likely to provide at least a short-term boost for the euro, but with the Federal Reserve (Fed) now openly discussing a 50 bps rate rise in May the euro will struggle against the dollar.
Ultimately, a decision to hold fire on any policy changes for now may be the least worst option for the ECB, given that other moves around fighting inflation risk pushing the eurozone economy towards a new recession.
In our EUR/USD technical analysis for 11 April, our market analyst Axel Rudolph wrote:
‘Following seven consecutive lower daily prices in EUR/USD, the currency pair stabilises above its $1.0806 early March low as France’s first round of its presidential election led to the incumbent Emmanuel Macron leading his rival Marine Le Pen by over 4% of the vote, better than some market participants had expected.
Volatility is likely to flare up again, though, in the two weeks leading up to the second round of the French presidential elections on Sunday 24 of April and around Thursday’s ECB meeting.
For now the trend in EUR/USD remains clearly bearish and we thus expect it to soon slip through the $1.0806 low with the February 2020 low at $1.0778 representing the next downside target. Further down sits the $1.0727 April 2020 low.
Above last Thursday’s high at $109.38, minor resistance can be found at the late March low at $1.0945 and along the breached one-month downtrend line at $1.1038.
Major resistance remains to be seen between the January low and March high at $1.1122 to $1.1185. While the cross stays below this area, the long-term downtrend remains intact.’
Chris Beauchamp | Chief Market Analyst, London
13 April 2022