Euro at 11-year lows – what next?

Arnd Wiegmann | Reuters

The euro dropped sharply ahead of Thursday's European Central Bank (ECB) policy meeting, leading some analysts to anticipate a rapid decline to parity against the U.S. dollar.

"The euro is sliding simply because it has not yet factored in the impact of the quantitative easing that starts next week," Greg Gibbs, head of Asia Pacific markets strategy at RBS said in a note on Thursday.

"The monetary settings are simply not fully priced in yet," he said, noting "the move towards parity may indeed be very fast."

The euro ran into heavy selling from early European trading on Wednesday, dropping from around 1.1170 to an 11-year low of 1.1061 in early Asian trading on Thursday.

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German bond yields also fell. As the German-U.S. yield differential continues to widen, Barclays head of FX Strategy, Asia Pacific Mitul Kotecha told CNBC, the euro will fall further: "We're still looking for parity by year-end."

So far this year, the 10-year benchmark German bund has dropped 23.5 percent to 0.381 percent, while the yield on U.S. Treasury's has risen 4.0 percent to 2.119 percent.

Waiting for details

Investors are focused on the ECB's policy meeting later in the global day, where the central bank is due to provide details on the 60 billion euro ($66.4 billion) bond buying program it announced in January.The program followed the central bank's losing battle with deflation. The annual inflation rate slipped below 1 percent in October 2013, trended lower and finally turned negative in December 2014, falling to -0.2 percent, according to ECB data.

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Focus on Thursday will be on when the central bank plans to start flooding markets with the quantitative easing money, analysts said. While buying is scheduled to start in March, the exact timing remains unclear; "[it could start] in the week following the ECB meeting," according to a Barclays research note published on Thursday.

The ECB's latest economic outlook for the euro zone will be another point of focus on Thursday as it provides its first forecasts for 2017, according to a BNP Paribas strategy note. The latest economic data suggest the euro zone is growing, if slowly – in the fourth quarter of 2014, the region's gross domestic product grew by a better-than-forecast 0.3 percent.

But the biggest focus, according to BK Asset Management Kathy Lien, will be on what Draghi says at the post-meeting press conference.

"How far the euro falls however will be determined by Mario Draghi's level of dovishness and pessimism," she said a note on Thursday.