The EUR has recently depreciated slightly versus the USD, and with a view to next week’s ECB meeting, the EUR weakness looks set to continue for now, said Thu Lan Nguyen, analyst at commerzbank. But the downside potential in EUR/USD is limited, as uncertainty regarding the further course of action by the ECB and the Fed remains high, the analyst said. Key Quotes “EUR/USD has broken out of its narrow trading range of the last two weeks to the downside. For one thing, this is due to a general USD rally after the US currency had traded much weaker recently on the back of the more dovish Fed. But an extremely cautious Fed approach has now been priced in sufficiently. Moreover, several FOMC members have struck a somewhat more optimistic tone of late. For example, Philadelphia Fed President Patrick Harker and San Francisco Fed President John Williams see a real possibility of up to three rate moves in the course of this year.” “But the EUR has also become weaker recently. And this weakness looks set to continue with a view to the ECB meeting in the coming week. Against the backdrop of the disappointing development of inflation expectations in the euro zone, the ECB will probably signal that it is still highly willing to take additional expansionary measures. In this context it is likely that ECB President Mario Draghi will make it clear that the ECB could indeed lower its interest rates further – after his corresponding comments following the last meeting were interpreted differently by the market, which caused the EUR to appreciate (chart 19). Although Draghi will surely deny that the package of measures adopted in March aimed to weaken the EUR exchange rate, the fact cannot be dismissed that the stronger EUR is not conducive to the ECB’s inflation efforts. Therefore, the market reaction seen at the time can hardly have been desirable.” “But the downside potential in EUR/USD remains limited near-term. Most market participants may remain sceptical as to whether the ECB can still ease its monetary policy at all. At the same time, they will not count on an imminent rate hike by the Fed as long as they get no unambiguous signal from the Fed officials, for example in the statement after the next meeting on 26/27 April.” For more information, read our latest forex news.