The Forex market is preparing for higher volatility as the biggest central banks in the world are due to set their monetary policy for the period ahead. The European Central Bank (ECB) is due to deliver the monetary statement in two days from now, while the Federal Reserve of the United States is expected to do the same in a bit over a week.
Expectations are for the interest rate differential gap between the two entities to get even bigger: the Fed signaled a new rate hike will be delivered at this March meeting, while the ECB is not possible to move on rates. The result will be that the tightening cycle is confirmed in the United States, while Europe seems to be stuck in negative interest rate territory. For now!
Despite the obvious things, the Euro is not looking like a bearish currency. As a matter of fact, last Friday, Mrs. Yellen, the Chairwoman of the Federal Reserve, held a speech and basically, she confirmed the new rate hike to come in March. Nevertheless, right at that moment, the EURUSD pair jumped higher.
For whatever the reason, the market is expecting something to happen from the ECB this week and only after that, the focus will be on the U.S. dollar. The ECB cannot do much, but it cannot ignore the positive economic data that started to surface lately.
PMI’s (Purchasing Managers Indexes) are in expansionary levels, stable and on the rise, HICP inflation (the harmonized one, and the one that is part of the ECB mandate) is just reaching the central bank’s mandate (below or close to 2%), and even the GDP growth last year was bigger than the growth in the United States of America.
All this might force the ECB to change the language for a bit and allow for a bit of a hawkish tone at this week’s meeting. As a result, the Euro might strengthen across the board.
The EURUSD pair is looking like is building energy fo a move above 1.08, while the EURJPY and EURGBP crosses are trading with a bid tone as well. While the ranges are small now, expect for volatility to be on the rise moving forward.
Even more interesting will be the fact that between these two monetary policy meetings, the NFP will be released this Friday. All in all, expect the market to make wild moves as positioning will be aggressive.