The European Central Bank (ECB) is due to deliver its monetary policy decision next Thursday. Ravaged by floods in Belgium and Germany, extreme heat in the south, and the COVID-19 pandemic, Europe faces one of its toughest summers in recent history.
If last week’s price action in financial markets was dominated by US events, such as the monthly inflation data and the Fed Chair’s semiannual testimony, this week is all about the euro. The common currency is the second reserve currency in the world and the only one capable of challenging the US dollar’s status.
Sure thing, the world’s reserve currency status is controversial – for some, it is a privilege, while others view it as a burden. But the dominant position changes in time, as shown by the British pound’s decline to only 4%. In other words, the euro could challenge the US dollar in the future. For now, the two are leading currencies in international payments via SWIFT, with an equal share in value of about 40% in May 2021.
The week ahead is critical for euro traders, as the ECB is set to announce its policy. Because the central bank made ESG and climate change an integral part of its mandate, as signalled in the strategy review, we will likely hear some more at this week’s meeting.
Events for the Euro Traders
The euro traded in tight ranges last week, as seen in the EUR/USD or the EUR/JPY pairs. The two were “glued” to 1.18, respectively 130, unable to move much.
But that may come to an abrupt end this week. Starting on Tuesday, the current account and the German PPI are the first pieces of economic data that may move the euro.
On Thursday, the ECB monetary policy stance and the press conference are the highlights of the trading day. The ECB has the luxury of not being pressed by rising inflation, unlike the Fed. Therefore, the accommodative monetary conditions will likely remain in place.
If we account for the current inflation in Europe, which runs at 1.9%, and the ECB deposit rate of -0.5%, we have a real central bank rate of -2.4%. By running the same math, the real rate in Europe is higher than the one in the United States (-5.3%) or Canada (-3.4%).
Finally, the last day of the trading week brings more details about the euro economies. The manufacturing and services PMIs are due, forecasted at 62.6, respectively 59.4. All in all, an important week for the euro and euro traders lies ahead.