Euro unlikely to see any gains despite the ECB planning an ‘easy money’ exit

  • Central bankers have signaled they are due to prepare the end of a four-year-long monetary stimulus program next week.
  • But the performance of the currency seems to be overshadowed by what happens in politics.
Daniel Roland | AFP | Getty Images

The euro is unlikely to see a massive upswing Thursday as central bankers meet to discuss the end of monetary stimulus in the region, analysts told CNBC.

The common currency has been recovering from political shocks over the last few weeks, trading Monday at $1.1790. This comes as central bankers have signaled they are due to prepare the end of its four-year-long monetary stimulus program.

Although such discussions would usually push a currency higher on the anticipation of higher yields, analysts are not predicting any solid gains for the euro.

"We doubt there is sustained scope for strengthening into the policy meeting," Todd Elmer, a foreign exchange strategist at Citigroup, told CNBC via email. "With no immediate change in policy forthcoming, the question is whether policymakers begin to signal the eventual roadmap for exiting recent accommodation."

He added that the ongoing rally in the euro is more about a readjustment in short-term positions, rather than on expectations that the European Central Bank (ECB) will change its policy.

ECB policymakers have suggested they are ready to start preparing the end of its quantitative easing (QE) program at Thursday's meeting in Latvia. At the moment the bond buying is set to last until September at a pace of 30 billion euros ($35.41 billion) a month. But with a tightening in monetary policy, it could ultimately drive the euro higher due to higher interest rates.

But the performance of the currency seems to be overshadowed by what's happening in politics.

"I expect some strength near term, but the political risks and interest rate differentials should cap a significant rally from here," Patrick Armstrong, managing partner at Plurimi Investment Managers, told CNBC via email.

Nonetheless, Armstrong added he expects the ECB will guide markets to plan an end to QE by December.

Meanwhile, Anatoli Annenkov from Societe Generale, said in a note Wednesday that the ECB will have "a confident yet cautious tone" Thursday, but an announcement on how QE will end will only happen in July, at the earliest.

He warned that if an announcement comes too early, the ECB will face credibility questions.

Stefan Kipar, economist at BayernLB, also told CNBC he foresees an announcement next month, and not on Thursday. "We expect this to be a slight disappointment for the euro, so that the single currency will give away some of its recent gains against the dollar," he said via email.

Ultimately, there are medium-term concerns that changes in politics will actually prove negative for the euro.

"The problem is that prospects for structural reform and greater European integration have likely declined in the wake of the formation of the new government in Italy," Todd said. "On the margin, this actually reduces the scope for both the ECB and fiscal authorities to act as a bulwark against potential future crises."