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Euro Drifts Lower Ahead of ECB Rate Decision

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·2 min read
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By Yasin Ebrahim

Investing.com – The euro drifted lower against the dollar Wednesday as investor attention shifted to the European Central Bank meeting on Thursday.

EUR/USD fell 0.19% to $1.2104, after hitting a session high of $1.2158.

The European Central is expected keep interest rates and the pace of bond purchases unchanged on Thursday.

The central bank eased policy measures last month, so many analysts believe there is little need to ease again even as Europe prepares for a prolonged period of Covid-19 restrictions.

"At its last meeting in December, the ECB Council decided on another comprehensive package of measures due to the second corona wave … At present, there is little to suggest that this time will be any different," Commerzbank (DE:CBKG) said in a note.

Morgan Stanley (NYSE:MS) agreed and went a step further, forecasting the ECB to keep rates on hold through year-end. "We expect no change in policy, with rates unchanged at -50bp, and see the ECB on hold for the rest of the year following December's extension and top-up of the pandemic responses."

With no change in policy, investor focus will zone in on the ECB's economic outlook, with some analysts warning the pandemic impact presents a risk to the central bank's current economic projections, which were published last month.

"In our opinion, however, its forecast of positive GDP growth in the current quarter appears overoptimistic while slow progress implementing vaccine programs poses a risk to the outlook for later in the year," Daiwa Capital Market said.

The recent strength in the euro, however, could draw some commentary from council members, according to Commerzbank.

"An important [discussion] is likely to be how the Council should react to another dynamic appreciation of the euro," Commerzbank said. "After all, following the temporary appreciation of the euro to more than 1.23 dollar, some ECB council members emphasized the council's high vigilance and hinted at an interest rate cut."

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