ECB's dovish stance should pressure Euro

The ECB policy settings are widely expected to remain unchanged in its January meeting and press conference (Thursday) this week. Its dovish rhetoric is expected to put a downward pressure on the currency.

In the statement and press conference, the ECB is likely to show concern with the tightening in financial conditions that has occurred since its December meeting, including 5% EUR NEER appreciation. This dovish message is likely to be reiterated by President Draghi and Executive Board Member Coeuré when they speak at the World Economic Forum in Davos, Switzerland on Friday. 

"With EA core inflation and market measures of inflation expectations remaining extremely low (the EA 5-year forward, 5-year breakeven inflation rate is about 1.6%, versus above 1.8% in early December, Figure 5), we continue to think longer or greater policy accommodation is likely, which should weigh heavily on the EUR," noted Barclays.

"We now expect euro area inflation to return to negative territory between Februaryand July 2016, picking up thereafter as a result of base effects, but averaging only 0.1% y/y for the year as a whole (vs. 1% in the ECB's December projections)."

ECB will likely be pressured to announce another round of monetary easing measures, but unlikely to be deployed before June, unless there is another bout of euro appreciation or a further significant drop in inflation expectations.