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Will Dovish Draghi Put Renewed Pressure on Euro vs Pound and US Dollar?

Ahead of the European Central Bank’s (ECB) March policy meeting the Euro has lacked particular support against its rivals, with investors awaiting the latest policymaker commentary.

Stronger-than-expected German industrial production figures temporarily boosted hopes for the meeting, to the benefit of EUR exchange rates.

However, the health of the Eurozone’s powerhouse economy is still far from assured as it remains largely reliant on domestic consumer spending.

With concerns also heightened regarding the outcome of the French presidential election, thanks to the continued polling strength of the far-right candidate Marine Le Pen, the outlook of the currency union remains unclear.

As a result, investors are not confident that the meeting will see any significant shift in the policy stance of the ECB, which could prompt the Euro to trend lower during the afternoon.

While the Eurozone Consumer Price Index rose to the Bank’s target of 2% in February this is not likely to prompt any change in monetary policy at this juncture.

Pernille Bomholdt Henneberg, senior analyst at Danske Bank, noted:

‘We expect core inflation will have to exceed 1.0% for a number of months before the ECB will announce tapering of its QE purchases. […] Our forecast for core inflation is it will be 0.9% on average this year and only go slightly above 1.0% at the very end of the year, implying the ECB, in our view, will not announce tapering of its purchases this year. We still believe the ECB will extend its QE purchases beyond December 2017.’

If President Mario Draghi maintains a relatively dovish tone, and continues to talk down the likelihood of the quantitative easing program being tapered, EUR exchange rates are likely to soften more substantially.

Even so, the relative weakness of the Pound could prevent the EUR GBP exchange rate from shedding particular ground ahead of the weekend.

Chancellor Philip Hammond’s budget speech failed to impress markets on Wednesday, particularly as the Office for Budget Responsibility forecasts also proved disappointing.

With the squeeze on income expected to be more severe than previously thought, as wage growth is predicted to remain muted, the future health of the UK economy appears fragile.

Friday’s visible trade balance figure could drag Sterling down against the Euro, with any widening of the trade deficit set to further undermine confidence in the domestic outlook.

Confidence in the US Dollar, meanwhile, was boosted after an unexpected increase in the ADP employment change figure for February.

Signs that the US labour market remains in a stronger state could encourage the Federal Reserve to raise interest rates sooner and at a more rapid pace than previously suggested.

Investors were encouraged by the likely positive implications for the non-farm payrolls report, even though the two measures do not always correlate to the degree that markets would like.

However, as markets have already largely priced in the odds of an imminent Fed rate hike any additional pressure on the EUR USD exchange rate could be limited.