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Euro May Fall as the ECB Stays Cautious Despite Economic Upturn

EURO, ECB, LAGARDE, CORONAVIRUS – TALKING POINTS:

  • ECB expected to keep policy mix as-is, tone of commentary in focus
  • Euro may fall if Lagarde sounds cautious despite economic upturn
  • Any details on the upcoming policy review will be closely watched

All eyes are on a monetary policy announcement from the European Central Bank (ECB) on Thursday. No changes to benchmark rates or QE asset purchases are expected but the follow-on press conference with President Christine Lagarde will command attention as markets try to divine the way forward.

Regional PMI surveys suggest the pace of manufacturing- and service-sector activity growth – while still muted – mounted a cautious recovery in the fourth quarter. Meanwhile, recent economic news-flow has increasingly topped forecasts, implying sturdier conditions than the markets have accounted for.

Euro May Fall as the ECB Stays Cautious Despite Economic Upturn

The extent to which this translates into rosier remarks from Ms Lagarde is likely to be front-of-mind for traders. A cautious tone despite signs of improvement may be interpreted as dovish relative to baseline projections, weighing on the Euro and contributing to an emerging risk-off tilt in global markets.

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Indeed, markets were in a defensive mood in Asia Pacific trade: the anti-risk US Dollar and Japanese Yen rose alongside US Treasury bonds – the perennial haven asset – while regional stocks and bellwether S&P 500 futures well with yields. Newswires flagged worries about the spreading coronavirus as the catalyst.

Euro May Fall as the ECB Stays Cautious Despite Economic Upturn

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Further details on the upcoming ECB policy review will also be of note. Lagarde said after the last policy conclave and in recent testimony to the European Parliament that re-evaluating the central bank’s price stability mandate will be at the heart of this process.

Details are scarce thus far, and the President will probably avoid over-indulging speculative interest by keeping her comments somewhat vague. Nevertheless, the markets will be keen to gauge whether it is likely to carry directional bias implications for monetary policy over the longer term.

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— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter