The euro is unlikely to see a massive upswing next week as central bankers meet to discuss the end of monetary stimulus in the region, analysts have told CNBC.
The common currency has been recovering from political shocks over the last few days, hitting its highest level on Thursday since May 15, at $1.1838. This at the same time that central bankers have signaled they are due to prepare the end of a four-year-long monetary stimulus program next week.
Although such discussions could push the currency higher, going into the meeting, due Thursday in Latvia, analysts are not predicting any solid gains in the euro.
“With no immediate change in policy forthcoming, the question is whether policymakers begin to signal the eventual roadmap for exiting recent accommodation,” Todd Elmer, foreign exchange strategist at Citigroup, told CNBC via email.
He added that the ongoing rally in the euro is more about a readjustment in short-term positions rather than on expectations that the European Central Bank (ECB) will change its policy. “We doubt there is sustained scope for strengthening into the policy meeting,” he added.
ECB policymakers have suggested they are ready to start preparing the end of the so-called quantitative easing (QE) program at a meeting next Thursday — at the moment QE is set to last until September at a pace of 30 billion euros ($35.41 billion) of monthly purchases. This means that a tightening in monetary policy is underway, which ultimately could drive the euro higher due to higher interest rates.
But the performance of the currency seems to be overshadowed by what happens in politics.
“I expect some strength near-term, but the political risks and interest rate differentials should cap a significant rally from here,” Patrick Armstrong, managing partner at Plurimi Investment Managers, told CNBC via email.
Nonetheless, Armstrong added that he expects the ECB will guide markets to plan an end to QE by December.
Anatoli Annenkov, from Societe Generale, wrote in a note Wednesday that the ECB will have “a confident yet cautious tone” next Thursday, but an announcement on how QE will end will only happen in July, at the earliest.
He warned that if an announcement comes too early, the ECB will face credibility questions.
Stefan Kipar, economist at BayernLB, also told CNBC he foresees an announcement on QE-end next month, and not on Thursday. “We expect this to be a slight disappointment for the euro, so that the single currency will give away some of its recent gains against the dollar,” he said via email.
Ultimately, there are medium-term concerns that changes in politics will actually prove negative for the euro.
“The problem is that prospects for structural reform and greater European integration have likely declined in the wake of the formation of the new government in Italy,” Todd said. “On the margin, this actually reduces the scope for both the ECB and fiscal authorities to act as a bulwark against potential future crises.”