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.”