The Euro started on a high note on Monday, rallying against most of the other main fiat currencies. The EURUSD, EURGBP, EURAUD, EURCAD – they all traded higher, in sharp contrast to how they ended the previous week.
The explanation is that the market is preparing for the ECB rate decision on Thursday. Which is set to be an important day for Euro traders, considering that the markets officially enter summer trading conditions shortly after.
What Changed Since the Last ECB Meeting?
The Euro consolidated since the last ECB meeting in June this year. The EURUSD pair offers the best example – it rose to above 1.14 one day after the June meeting and traded between 1.12 and 1.14 in the following six weeks.
Other Euro pairs followed suit – the EURGBP crossed the 0.9 level multiple times, while the EURAUD pair found bids in the 1.62 area. What changed since the last ECB meeting?
The interesting part is that the ECB is expected to keep the monetary policy steady. However, since the last meeting, the previous decisions had time to get their way through the financial markets as the transmission mechanism takes a while until the effects are visible.
Prospects for the Euro, an alternative to the USD, have also improved. On the one hand, the European Union is perceived to be handling the coronavirus better at this point in time, in sharp contrast with what is happening in the United States.
On the other hand, the EU recovery fund, currently under discussion, signals a closer step towards further financial and economic integration. As such, the outlook for the single currency has strengthened considerably and may lead to a sustained narrowing of peripheral spreads.
The hope is that an agreement regarding the EU recovery fund will be reached by August this year. Without any news to counter such expectations, the Euro should find bidders on every single dip.
However, there is a catch. As any currency trader knows, the FX market is not about one single currency, but a pair of currencies. Yes, it is true that the Euro traded higher yesterday against most of the other fiat currencies. But that can change in a blink of an eye, should investors be disappointed by the ECB this Thursday.
So far, all the main Euro pairs trade in a strictly defined range since the June meeting. Will this week’s meeting bring the much-awaited breakout?