Will the EUR/USD Continue to Rise Following the ECB Meeting?

All eyes are on today’s European Central Bank meeting, where President Mario Draghi is widely expected to maintain a hawkish tone following his bullish remarks on the state of the Eurozone economy at the end of June. However, traders remain divided about whether Draghi will change his views on European QE.

"We can be confident that our policy is working and its full effects on inflation will gradually materialise. But for that, our policy needs to be persistent, and we need to be prudent in how we adjust its parameters to improving economic conditions”.

The ECB is expected to tighten monetary policy for several reasons: inflation figures have improved, economic growth in the Eurozone is continuing to improve, and political uncertainty has lessened.

Speaking at the European Central Bank Forum in Portugal at the end of June, Mario Draghi said that the current stimulus plan would remain in place as the effects of inflation have been "more muted than one would expect". The ECB would therefore have to be prudent to “gradually adjust its monetary stimulus to the economic recovery”, but could still consider warning investors about future actions that might lead to tapering.

The EUR could benefit from a tapering

Decisions made by central banks can influence the cost and availability of funds in a given economy, directly impacting the supply and demand for the national currency, and significantly affecting the Forex market. Traders should note any changes in policy made by central banks, as these can indicate coming market volatility.

A spike in volatility could still occur if Draghi announces a taper to the ECB’s bond purchase program. Any bullish comments will influence the Euro and could trigger major market turbulence.

The EUR/USD has just reached its highest level since May 2016. This bullish movement could either continue, or reverse. Here are the 2 possible scenarios markets could face:

1.    A "hawkish status quo" from the ECB, which doesn’t change monetary policy, but shares optimism about increasing growth and inflation in the Eurozone. This might suggest that a tightening of monetary policy could happen by the end of 2017. Many EUR/USD traders would favour this option.   

2.    Mario Draghi highlights the numerous risks facing the Eurozone economy, encouraging more stimulus in the coming months.

From August 24th - 26th, Mario Draghi will be attending the Kansas Federal Reserve’s symposium in Jackson Hole, Wyoming where he is expected to present the ECB’s final decisions regarding “after-summer European monetary policy”.