EUR & ECB Crib Sheet: Little new news for the euro

The European Central Bank meeting this Thursday should have a fairly limited impact on the euro (as per the scenario analysis in Figure 1). No new measures are expected to be announced (following a top up of the Pandemic Emergency Purchase Programme at the June ECB meeting), the economy is gradually recovering and the meeting should be more about testing President Christine Lagarde's communication skills (see ECB preview: The breather meeting for details) rather than any new measures.

So far, the ECB measures have managed to fully compress the EUR risk premium, with EUR/USD in fact trading expensive vs USD on a short-term bias (as per our short-term financial fair value model in Figure 2). Indeed, the options market does not show any signs of stress (Figure 3) while the speculative community remains long EUR/USD (see FX Positioning: EUR’s primacy solid ahead of key events).

The forthcoming ECB meeting should not change much, with the discussion/progress on an EU Recovery Fund being a more important short-term driver for the EUR/USD. Any potential progress on the recovery fund at the EU summit (starting on Friday) should translate into support for EUR/USD for the remainder of the week, with the ECB meeting playing second fiddle.

We continue to see EUR/USD breaking the 1.15 level this summer and moving towards 1.20 by year-end as the expected soft US dollar environment pushes the cross higher. The ECB's measures, which have reduced the risk premium for the euro, should facilitate this move but the weak dollar environment should be the prime catalyst behind the appreciation of the cross.