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Euro recovers ahead of highly uncertain ECB meeting

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10 March 2022

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

Most risk currencies rallied on Wednesday, as an easing in commodity prices allayed global growth fears and buoyed risk sentiment in financial markets.

P
rice action in commodities was fairly mixed yesterday, although investors focused predominantly on a decline in oil and gas prices from very elevated levels. Brent crude oil fell by around 5% for the day, while EU natural gas was down by around 30%, partly a consequence of investors taking the view that the US ban on Russia oil and gas imports wouldn’t lead to a significant supply shock. Not only has this eased concerns over a sharp jump in global inflation, but growth fears also subsided somewhat, leading to a general rebound in risk currencies.

Most emerging market currencies rallied yesterday, led by those in Central and Eastern Europe, which have been battered during the course of the crisis period so far. The Hungarian forint and Polish zloty both rose by around 4% on the US dollar on Wednesday, with the typically less volatile Czech koruna also up around 2%. Indeed, most EM currencies posted fairly significant advances, led by the European ones. Notably, EUR/USD managed to move back towards the 1.11 level for the first time in around a week, with the pair helped on its way by reports this week that the EU was planning on unveiling a massive bond issuance designed to allay the impact of the Russian invasion on the bloc’s economy.

Whether the euro is able to post further advances today is anyone’s guess given the uncertainty going into this afternoon’s European Central Bank meeting. As mentioned in our ECB preview report, this Thursday’s meeting is one of the hardest to call in recent memory. We think that the bank likely has two main choices on how to proceed. It can either announce that it is speeding up the pace of APP withdrawal, albeit at a more gradual speed than anticipated immediately prior to the invasion. Or it could simply stand pat and delay its decision entirely until at least the next meeting in April. Given recent comments from ECB members, we think that the latter is more likely. The bank’s updated macroeconomic and inflation forecasts will also be key. A marked downward revision to growth and a sizable upgrade to the inflation projections would be perceived as dovish for the euro, and all of today’s gains could quickly be erased under such a scenario.

Regardless of Lagarde’s tone, we expect volatility to be high surrounding the ECB’s statement (12:45 GMT), and press conference (13:30).

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