In US trade, the euro managed to edge higher against the dollar, despite mounting fears that Thursday’s ECB decision will underwhelm the market after Mario Draghi’s supportive words last week.
In a joint declaration with Italian Prime Minister Mario Monti, French President Francois Hollande asserted that 'the Eurozone must be defended, preserved, consolidated, and we must work for its integrity’.
Mr Hollande claimed the eurozone has made ‘significant progress in recent weeks,’ and noted the ‘strong words’ spoken up by Mr Draghi. While there remains numerous sceptics, the broader market is still expectant that the ECB will announce the reactivation of its Security Markets Programme (SMP). To date, there has been little speculation as to the size and duration of such a programme, but it is hoped the outcome will be a meaningful reduction in bond yields, particularly those of Spain and Italy which have been the cause of most concern.
No doubt Mr Draghi’s words will be chosen carefully to assure markets that the ECB is willing to act, and at the same time signal to the targeted countries - such as Spain and Italy - that ECB support is not a substitute for economic reform. Most analysts do not expect a change to the official cash rate of 0.75%, although some have suggested a further 25 basis point cut later in the year. Before the ECB decision on Thursday is the Fed’s decision tonight.
While hopes of fresh policy initiatives (including further QE) are high, the general consensus is that such action, if forthcoming, will be deferred until the September meeting, allowing the Fed two further payroll reports on which to determine its course of action. Having ended yesterday’s Australian session around the 1.2275 level, the euro pushed up to a high of 1.2330 before paring gains to finish the US session at 1.2304. Upon resuming for Asian trade, the euro has drifted modestly to be in the mid-1.2280 range.