EURUSD spikes on ECB forward guidance hint

The euro spiked higher after traders saw the hawkish side in the minutes from the latest ECB policy meeting. Of particular note, the ECB suggested that language on forward guidance could be changed early this year. This ought not to be a big surprise, given the pace of recovery we have seen and time horizon for the QE programme, but it has nevertheless given euro bulls a reason to be more confident.

‘The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year,’ the minutes said.

The implication is the ECB could be willing to be a little more precise on when it expects to be able to raise interest rates and is more confident in the recovery sustaining momentum. Currently the guidance states that the key ECB interest rates will remain at their present levels ‘for an extended period of time, and well past the horizon of the net asset purchases’.

That is not to say it is planning to pursue a swifter route to normalisation of policy; and indeed the minutes state the forward guidance framework would ‘evolve naturally, in line with the established sequencing between the APP and interest rate guidance’.

Furthermore, the ECB warned that ‘signals that could trigger an unwarranted tightening of financial conditions needed to be avoided, as they could jeopardise progress towards the Governing Council’s inflation aim’.

The message is very much that the ECB will stay data-dependent and markets should expect it to gradually alter forward guidance as the recovery progresses and inflation converges with target.

EURUSD rallied to test psychological resistance at $1.20 but there is little else in the minutes that would suggest the ECB is planning to be any more hawkish, which may cap gains. At send time EURUSD had just broken through $1.20 and could enjoy a little further uplift from momentum trading before this rally fades.

Neil Wilson

Senior Market Analyst

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