EUR/USD to reverse bearish trend on clear hawkish signal from the ECB – MUFG

Euro holds its ground as focus shifts to European Central Bank (ECB) policy announcements. The shared currency could reverse its bearish trend if the central bank delivers a hawkish policy surprise, economists at MUFG Bank report.

ECB is in an increasingly challenging spot when setting policy

“While we are not expecting any material change in ECB policy at today’s policy meeting, there is clearly a risk of a hawkish surprise. The eurozone rate market believes the ECB will be under even more pressure to potentially end QE at the June meeting and then start hikes at the following meeting in July. It could lead to some disappointment today if there is no change to the ECB’s forward guidance.”

“ECB is in an increasingly challenging spot when setting policy as downside risks to growth in Europe are continuing to build as well from: i) the Ukraine conflict which looks like it is going to be more prolonged. President Putin stated this week that peace talks were at a dead-end, ii) ongoing COVID-19 disruption in China and iii) the lingering risk of a shock Le Pen election victory still can’t be ruled out. These downside growth risks have all been weighing on the euro at the start of this month.”

“The ECB would have to deliver a clear hawkish policy signal today that is planning to raise rates sooner to reverse the current bearish euro trend.”

See – ECB Preview: Forecasts from 12 major banks, tighter policy in response to higher inflation