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CURRENCIES : Euro Falls Back As Traders Watch For ECB's QE Hints

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03/08/2018 | 11:15am CET

By Sara Sjolin, MarketWatch

Dollar rises ahead of expected tariff announcement

The euro headed lower on Thursday, with traders erring on the side of caution ahead of the European Central Bank's policy statement that could provide hints on when its quantitative easing program will end.

Meanwhile, the dollar picked up steam against other currencies as foreign-exchange investors continued to track developments in President Donald Trump's plans for tariffs on steel and aluminum imports. An announcement on the tariffs is expected Thursday afternoon.

What are currencies doing?

The euro dropped to $1.2387 from $1.2411 late Wednesday in New York, and was on track to break a five-session winning streak.

The ICE U.S. Dollar Index rose 0.1% to 89.725, as the greenback advanced against all other major currencies.

The pound declined to $1.3880, down from $1.3903 on Wednesday.

The yen also fell, with the dollar buying Yen106.03, compared with Yen106.07 on Wednesday.

What is driving the market?

The euro slipped back as traders waited on the ECB's policy decision for any hints on the future of monetary policy. The central bank is widely expected to keep rates and its key stimulus program on hold, but the big question is if the rate setters are changing their forward guidance.

According to ECB's current forward guidance, the quantitative easing program is slated to run "until the end of September 2018, or beyond if necessary," with the bank standing ready to "increase the asset purchase program (APP) in terms of size and/or duration," if the economy sours.

If the ECB removes these sentences from the statement, it's seen as a hawkish shift and likely to send the euro higher, and possibly regain the $1.25 handle, according to analysts. The ECB announces its policy decision at 12:45 p.m. London time, or 7:45 a.m. Eastern Time, followed by central bank chief Mario Draghi's news conference at 1:30 p.m. London time.

For dollar traders, the Trump's planned tariffs remained in focus. Fears over a global trade war have eased after comments from the White House that major trading partners Canada and Mexico could be exempt . President Donald Trump is expected to sign the tariff order on Thursday, with an announcement planned for 3:30 p.m. Eastern Time, according to media reports .

What are analysts saying?

-- "Whilst equity markets have certainly ben fixated on Trump's tariffs, in forex, there has been a consolidation in front of a crucial monetary policy announcement by the European Central Bank," said Richard Perry, market analyst at Hantec Markets, in a note.

"Governing Council President Mario Draghi is a cautious dove and the threat of a trade war with the U.S. could give him another excuse to get the ECB to hang back from any hawkish shift, even if it is very minor. Quite how unanimous the decision would be will be interesting, and one for the press conference. This all may mean a slight disappointment for the euro bulls could be on the cards," Perry added.

-- "ECB optimism could be drive EUR/USD back to 1.25. Should Draghi sound more cautious, we could see a nasty reversal in EUR/USD as speculators are clearly leaning towards optimism," said Kathy Lien, managing director of FX Strategy at BK Asset Management, in a note.

What else is on focus on Thursday?

Weekly jobless claims are due at 8:30 a.m. Eastern Time, followed by data on household debt in the fourth quarter at noon.

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