Jane Foley, Research Analyst at Rabobank, suggests that the experience of December when ECB policy easing clearly fell short of expectations has driven home the risk that the market could be disappointed again today. Key Quotes “That said, the climate has altered since the end of last year. The frenzied 2.4% rally in EUR/USD that followed the ECB’s December policy announcement was propelled by a plethora of short covering. According to CFTC data, speculators’ net EUR shorts are currently around one third of the size they were in early December. The implication is that positioning has lessened the room for disappointment, though it has not been removed. It is not just EUR shorts that have dropped since early December. The ECB are likely to be anxious that any policy decision today also fails to have an impression on the FX markets. Since the middle of last year the EUR has been displaying safe haven characteristics. We have put this down to its function as a funding currency and the Eurozone’s large current account surplus. During the latter half of 2014 and early 2015 the market was content to build up large short EUR positions and move into riskier assets. However, the mood started to change dramatically in the middle of last year as the bubble burst in the Chinese stock market and EUR shorts started to be covered. After a very difficult start to 2016, in recent weeks market sentiment has begun to display a more stable tone. This should work in the ECB favour as it suggests that investors could be more inclined to lengthen EUR shorts again on any further ECB measures today. That said, recent signs of optimism in the market have been heavily laced with caution. Concerns over the pace of world growth and the ability of key economies to shrug off deflationary risks remain at heightened levels. Thus, while we expect that the ECB will succeed to pushing the value of the EUR lower, we expect that downside potential for EUR/USD remains moderate. We retain a 6 mth forecast for EUR/USD at 1.07 and look for a more to 1.05 on a 12 mth view. These forecasts assume that inflation potential in the US is sufficient for the Fed to hike rates further this year.” For more information, read our latest forex news.