The European Central Bank policy update is on deck for Thursday, but little new is expected from ECB president Mario Draghi. Instead, euro traders are looking to Friday’s U.S. GDP numbers as a potential driver for the shared currency.
In Thursday’s monetary policy updates, due at 7:45 a.m. Eastern U.S. time, followed by a press conference at 8:30 a.m. Eastern, the ECB isn’t expected to make any waves.
Since its June update — in which Draghi & Co. announced that asset purchases would be tapered further into year end but that rate hikes weren’t on the cards until well into 2019 — market expectations for the ECB have been muted.
“We look for this ECB meeting to largely be a summertime placeholder,” wrote strategists at TD Securities led by Jacqui Douglas on Wednesday. “The only real burning question is around the translation issues with the rates guidance,” he said, adding he was hoping on more clarity on when rates will go up.
The euro EURUSD, +0.1541% has been rather range-bound in July, up only 0.1% month to date; it was fetching around $1.1678 in Wednesday trading. This isn’t expected to change much if the ECB stays on course, though traders will be focused on what the central bank’s growth forecasts for the second half of the year look like.
However, should Draghi leave the door open for a first rate hike in June or July 2019, the euro could have some upside in the direction of $1.18, the TD analysts said. Similarly, ruling out 2019 summer rate hikes would push the currency lower, they said.
“Although the degree of long positioning in the broad U.S. dollar is sizable, the short-euro component of that trade is not particularly stretched,” said Stephen Gallo, European head of FX strategy at BMO. “As such, we think subtle elements of hawkishness concerning the rebound from weaker activity in Q1 and evidence of firming price pressure are unlikely to lead to a substantial euro rally.”
In the press conference, Draghi will very likely be asked about the ongoing trade spat between the U.S. and trade partners, including the EU. European Commission President Jean-Claude Juncker was in Washington on Wednesday to meet with President Donald Trump about trade.
Last week, Trump called the EU and China out as currency and interest-rate manipulators, saying that they were pushing the dollar up and rendering the U.S. less competitive on the global market.
Draghi has previously said there was “no ground to be optimistic” about the trade tensions, and that the lessons from the past on the matter were all negative.
The more muted the ECB’s update will be, the more important Friday’s U.S. GDP numbers become as a driver for the euro, market participants said.
Last week, Trump economic adviser Larry Kudlow said GDP could reach 4% for a quarter or two, fuelling expectations of boosted growth.
The second-quarter growth figures are due at 8:30 a.m. Eastern on Friday. The median forecast by economists surveyed by MarketWatch is 4.3%, up from 2% in the first quarter of the year.
Some market participants’ forecasts are even as high as 5%. That’s a steeper growth rate that they believe has been fueled in large part by the Trump tax cuts, the effect of which will be much for visible in the April-to-June quarter than in the first three months of the year. But just a single quarter of rapid expansion doesn’t mean long-term growth will keep up the pace, economists and strategists remind.
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Still, a GDP print in line with expectations would still likely boost the U.S. dollar and the euro stands to get slammed the most by its main rival.
After all, with the Federal Reserve already in rate-hike mode, the 2018 currency story has been largely dollar-driven. The closely followed ICE U.S. Dollar Index DXY, -0.24% , which is more heavily weighted toward the dollar’s relationship with the euro, is up 2.4% so far this year.