Euro inches higher ahead of ECB decision

The euro held firm on Thursday ahead of a European Central Bank policy decision, with the focus on what the ECB might say about the currency’s recent strength and how that may influence the policy outlook.

The euro edged up 0.1 percent to $1.1925 EUR=, still some way off last week's high of $1.2070, its highest level since January 2015. 

The common currency has lost some momentum since hitting that 2-1/2 year peak, weighed down by rising expectations that a stronger euro could slow the ECB’s plans to rein in its bond-buying stimulus. 

Only 15 of 66 economists polled by Reuters expect the ECB to announce a reduction of its monthly asset purchases at Thursday’s ECB policy meeting -- a sharp reversal from a month ago when slightly over half of respondents expected such a move.

ECB President Mario Draghi is set to start laying the groundwork for stimulus reduction at Thursday’s meeting, but will probably hold off on any major commitment. 

One focus is whether Draghi will express any reservations about the recent strength in the euro, which has gained more than 13 percent against the dollar this year. 

Jasslyn Yeo, global market strategist for J.P. Morgan Asset Management, said it wouldn’t be surprising to see Draghi raise concerns about the euro’s strength, which will exert downward pressure on euro zone inflation. 

That would force the ECB to take a slower approach toward policy normalisation, and the euro looks susceptible to a pull-back against the dollar in the near-term, Yeo said.

The euro could rally if the ECB and Draghi refrain from commenting on the currency’s rise, said Tareck Horchani, head of sales trading in Asia Pacific for Saxo Markets in Singapore. 

On the other hand, if they do express concerns and the euro sells off, the common currency will probably find support in the $1.17 to $1.18 area, Horchani said.