The ECB and the EUR, the Dollar and the FED

So, with February’s ADP nonfarm employment change figures coming in well ahead of expectations on Wednesday, the probability of a rate hike by the FED next week has inched up to 86% ahead of tomorrow’s government figures for nonfarm payrolls and wage growth, though the markets have yet to fully price in a rate hike ahead of the data and with good reason.

The Dollar managed to hold on to Wednesday’s gains through the Asian session, whilst there has been an easing ahead of the European open, the Dollar Spot Index is up 0.04% at 102.11, down from an intraday high of 102.23 at the time of the report. Focus going into the European session will be shifting towards today’s ECB interest rate decision and, more importantly, press conference this afternoon.

This morning’s inflation figures out of China may have come at just the right time for the Draghi and the team to be able to maintain their view that inflation has largely stemmed from rising crude oil prices and should by no means be considered as a reason to begin monetary policy normalization, making this evening’s press conference all the more interesting.

The German government has continued to pressure the ECB to begin a path towards normalization of policy, but to no avail and pressure has mounted with German retail sales on the decline for the 3^rd consecutive month in January, according to figures released last week.

Rising prices is certainly a risk to the economic recovery and with inflation currently sitting above the ECB’s target, Draghi’s view will certainly provide the markets with some indications of the ECB’s intentions in the coming months, the risk of an extended overshoot beyond the sub-2% target likely to be a concern for some, if not all members of the governing council.

With the FED looking all the more likely to lift rates next week, on the assumption that tomorrow’s nonfarm payroll and wage growth figures don’t disappoint, Draghi’s fears of EUR strength will ease to a certain degree, the weakness in the EUR having been a key component to the economic recovery in the Eurozone, providing the euro bloc with favourable trade terms.

There’s plenty of uncertainty ahead of today’s decision and press conference however, despite the particularly dovish commentary last month. The ECB has various options should the decision be to respond to the jump in inflation, with the two most obvious choices being a tapering to the asset purchasing program and bringing the deposit facility rate out of negative territory, though some would perhaps prefer an adjustment to the current interest rate, which sits at zero.

The EUR has been particularly weak of late and talks of Dollar parity with the EUR have certainly done their rounds, hinged on the ECB maintaining its dovish outlook, with the FED delivering on 3-rate hikes for the year. A shift by the ECB will certainly drive the EUR, such a move certainly not priced in despite recent speculation of a need for the ECB to make a move. The Eurozone economy has made large strides over the last 12-18 months, while downside risks remain with concerns over member state elections, China and the U.S administration likely to be referenced by Draghi through the press conference, should the decision be to hold.

At the time of the report, the EUR/USD sits at $1.05480, up 0.07% on the day, recovering from an intraday low $1.0525 with a bounce at the European open. We can expect some volatility through the early part of the day.

A hold on interest and deposit facility rates will likely leave the EUR on the back foot going into the press conference. Draghi’s comments will be the key driver however, any hint of a move towards normalization a positive for the EUR, whether it’s this month or in the near-term. Anything less will more than likely weigh on the EUR through to tomorrow’s nonfarm payroll figures out of the U.S.

While focus is on today’s rate decision and press conference, the negative sentiment towards next week’s Dutch election and France’s 1^st round vote next month are unlikely to dissipate anytime soon, an eventual victory by Wilders or Le Pen raising the stakes of a breakup of the Eurozone.

Economic data out of the U.S is on the lighter side this afternoon and, with the release of the U.S data coinciding with the start of the ECB press conference, barring a particularly weak initial jobless claims figure, the data will likely be brushed aside by the markets, leaving the EUR in the limelight.