Christopher Vecchio, Currency Analyst at DailyFX, comments:
“The European Central Bank’s dovish rhetoric show hit the road this week as policymakers continued the pushback against the perceived hawkish nature of the March policy meeting. Several different policymakers commented on the fragmented state of Euro-Zone credit, the impact of the elevated Euro exchange rate on inflation, and the prospect of additional non-standard easing in the months ahead. The timing couldn’t be more calculated with the central bank set to gather once again this coming Thursday.
“The difference between where we stand today from say, the eve of the ECB’s March meeting, is that the economic data climate has worsened noticeably, undercutting the one true source of stability for ECB policy. The Citi Economic Surprise Index fell to a fresh 2014 low last week, hitting -7.4 on Wednesday and settling at -3.8 on Friday, its lowest weekly closing level since November 1, 2013 (-3.8) – the ECB cut its main refinancing rate just six days later at its November policy meeting.
“The sudden downswing in growth momentum, alongside the soft inflation environment (weakest CPI at +0.5% in over four years), has elevated the likelihood of further dovish action by the ECB this week. The time for ECB action may be nearing, but with speculation building that something might happen – EUR long contracts were reduced by -25.6% this week, per the CFTC’s COT report – a lack of a concerted policy response could just as easily send the Euro back towards its yearly highs.”