Market Insider

The dollar might be in play as the ECB could send the euro higher

Key Points
  • The European Central Bank meets Thursday and traders are watching to see if a hawkish Mario Draghi will send the euro higher.
  • The ECB is expected to lay the groundwork to announce a tapering of its asset purchase plan at its September meeting.
  • Draghi was the first central banker to sound more hawkish several weeks ago, so his comments will be important.
European Central Bank (ECB) President Mario Draghi arrives for a news conference at the ECB headquarters in Frankfurt, Germany, December 8, 2016.
Ralph Orlowski | Reuters

The dollar has been kicked around by a dovish Fed, weak U.S. data and the lack of action in Washington.

On Thursday, it'll be Europe's turn to take a shot.

The European Central Bank is not expected to adjust interest rates, but it is expected to signal that it will soon lay out plans to slow down some of its asset purchases in the next few months. Depending on how the central bank and ECB President Mario Draghi deliver that message, the euro could make a move higher against the dollar.

The dollar index was a hair higher Wednesday, but it's down about 1 percent for the week so far, and 2.8 percent over the past month. The euro's 3.2 percent gain against the dollar in the last month makes it tricky for Draghi, as the stronger euro zone currency means it will be harder to generate European inflation. Higher bond yields, softer stocks and a stronger currency are not the what Draghi wants to see.

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"He doesn't want that basically. That's a strong incentive to make him not talk too hawkishly, but at the same time you've got to be truthful. When asked questions you need to be credible," said Alan Ruskin, head of G-10 currency strategy at Deutsche Bank. "I don't think you're going to get a lot of detail. I expect them to be setting themselves up for tapering."

The ECB is set to announce its rate decision at 7:45 a.m. ET, and Draghi is scheduled to speak at 8:30 a.m.

The Bank of Japan is also meeting Thursday, although it's not expected to take any action. Both central banks meet ahead of the Federal Reserve policy meeting next week, where the U.S. central bank is unlikely to take any action. Fed Chair Janet Yellen's comments before Congress last week on the Fed's concerns about inflation and its view that interest rates could remain below historic levels sent the dollar lower.

U.S. markets are focused on Draghi since his comments were taken as hawkish several weeks ago, and he was the first of several central bankers that suddenly sounded as if there was a unified effort to move away from easing. That sent global sovereign yields higher, but Yellen's comments and soft U.S. inflation data helped reverse some of those moves.

Expectations for a third Fed rate hike this year are fading, recently getting a knock from Friday's consumer price index inflation showing a weaker-than-expected trend. But the Fed is widely expected to announce it will taper back its purchases of Treasury and mortgage securities when it meets in September. There were a handful of Fed watchers who have said the Fed could announce tapering next week.

The Fed currently purchases securities to replace those that are maturing on its $4.5 trillion balance sheet. That's the program it will gradually taper back.

"I think Draghi is aware of the sensitivity the markets have to whatever he says or does," said Peter Boockvar, chief market analyst at the Lindsey Group. "I think the most we'll get from him is they'll no longer say, 'If we need to do more QE, we'll do more QE.' At the prior meeting, they took out, 'If we need to cut rates, we'll cut rates again,'" he said.

Markets widely expect the ECB, at most, to suggest it could announce more details on tapering back its asset purchases by September.

Draghi is "going to acknowledge the economy is doing well but he'll also say at the same time, inflation remains low," Boockvar said. "All the ECB officials are afraid of upsetting the market. They're going to to do their best to treat the markets with kid gloves."

Additionally, there are some U.S. data expected Thursday, including weekly jobless claims and Philadelphia Fed survey at 8:30 a.m. ET, and leading indicators at 10 a.m.

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