How concerned is the ECB about the EUR?

Concerns about China, the falling oil price, the appreciation of the EUR. No, the current developments are unlikely to please the ECB, as they threaten to undo its efforts over the past few months of returning inflation to its target of 2%. At least that is the general perception on the financial markets. Of course the main question is what view the ECB is going to take and above all how it will react. 

No doubt the market is expecting a dovish ECB. That means ECB President Mario Draghi is likely to sound concerned about recent developments on the markets. For the FX market any comments on the EUR exchange rate are of particular significance.

On the one hand one could argue though that even at current levels EUR-USD is trading at roughly 20% lower levels than in mid-2014. So what difference do 6% make? On the other hand the appreciation of the EUR is happening at the worst possible moment, as the falling oil price has once again put pressure on inflation expectations in the euro zone, notes Commerzbank. 

"However, we would advise against excessive EUR euphoria today. In view of the unwelcome inflation outlook Draghi is likely to at least threaten further expansionary monetary policy measures, i.e. an extension or increase of the bond purchases (QE). It is even imaginable that the central bankers decide on small changes of their QE programme at this early stage thus underlining their willingness to do more. These developments are unlikely to cause a spectacular depreciation in EUR, as some market participants are expecting the "Big Bertha", i.e. an extension of the QE programme already for today, but it will probably be sufficient to prevent EUR appreciation. This should be of some comfort to the ECB", said Commerzbank in a report on Thursday.