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Euro rally predicted as traders await Draghi comments

Mario Draghi, president of the European Central Bank (ECB), reacts ahead of a Eurogroup meeting of European finance ministers in Brussels, Belgium, on Monday, May 22, 2017.
Jasper Juinen | Bloomberg | Getty Images
Mario Draghi, president of the European Central Bank (ECB), reacts ahead of a Eurogroup meeting of European finance ministers in Brussels, Belgium, on Monday, May 22, 2017.

The euro could rally Thursday afternoon in the aftermath of a monetary policy meeting from the European Central Bank (ECB), despite earlier reports suggesting a dovish stance from President Mario Draghi.

"Draghi will try to roll out the dovish artillery to avoid the impression that there is any shift in the ECB's stance, but a shift is taking place nonetheless as the ECB will need to eliminate the more dovish guidance from its latest statements, like the possibility of more easing," John Hardy, head of forex strategy at Saxo Bank, told CNBC via email on Thursday morning.

"I think the dovish inflation forecasts that were leaked were a way to avoid the euro rallying – which I think it will eventually in the wake of today's (Thursday's) meeting, even if there is a brief dip because very little new is actually announced," he added.

On Wednesday, media reports from Bloomberg indicated that the ECB is set to cut inflation outlooks through 2019 and raise gross domestic product projections for the same year. The euro dipped on the reports.

Though analysts do not foresee a change in policy at Thursday's meeting, they mostly point to an easing in tone from Draghi. Economic indicators have shown a more resilient euro area and inflation has neared the central bank's close but below 2 percent target. Core inflation figures remain subdued.

"The market is setting up for a dovish meeting today given the rumors of a dip in the ECB's inflation forecast. I suspect the EUR/USD will fall as Draghi speaks, but then eventually recover. The range is 1.05-to-1.15 in my view," Claus Vistesen, euro zone economist at Pantheon Macroeconomics, told CNBC via email.

The euro was slightly higher against the dollar in the early hours of Thursday, trading at $1.1262. However, some analysts see some room for disappointment for the euro bulls.

Jane Foley, head of forex strategy at Rabobank, told CNBC via email on Thursday morning: "We do not expect the ECB to change its forward guidance today. Therefore we see risk that EUR bulls will be disappointed by a dovish tone from Draghi today."

The General Election in the U.K. could also influence the euro Thursday. "EUR/GBP likely will rise if May gets a big majority as markets will discount a hard Brexit. If Corbyn wins, EUR/GBP will plunge I think. But this is just initially. Corbyn's economic policies are very GBP bearish in my view," Vistesen said.

Polls on the eve of the vote showed the Conservatives returning to power with an increased majority.

"As for sterling, our base case is that the Conservatives manage at least a slim majority and this will see a modest kneejerk rally (bigger rally if majority is stronger) versus the euro, but that the election is really a sideshow to the Brexit talks getting underway later this month – so little impact on euro except another excuse for eventual strength," Hardy from Saxo Bank added.

The euro was also slightly higher against sterling at £0.8690.

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