The euro has recently underperformed against other G10 currencies, point out analysts at MUFG Bank. They warn, next week’s European Central Bank (ECB) meeting could be more of market mover than previously expected.

Key Quotes:

“The main event risk for the EUR in the week ahead will be the ECB’s latest policy meeting. While the upcoming ECB policy meeting was previously viewed as a non-event for markets after the ECB just announced an extension of faster QE purchases in Q3 at their last meeting on 10th June, there is now a higher risk it will prove more market moving.”

“There is a material risk though that the ECB delays announcing those policy steps until they have more data available in September. The new policy framework gives them justification to announce policy action sooner if they choose to.”

“We expect the ECB to maintain a cautiously optimistic outlook for the economic recovery in the euro-zone but continue to acknowledge downside risks posed by the spread of the Delta variant.”

“Decisive ECB policy action to back up the new policy framework could trigger a fresh EUR sell off next week at a time when other major central banks (BoE & Fed) are moving closer to raising rates. A failure to act would provide some relief for the EUR.”

“The risks though for next week are higher that there is a more lasting impact on EUR given this meeting follows the updated monetary policy strategy review and ECB President Lagarde has clearly indicated that changes will be made, at least to guidance and depending how explicit those changes are will determine the impact. Any shock or surprise is likely to imply a EUR downside move.”