Comment: Beyond the ECB's monetary policy and the EURUSD impact

It is a critical day for the Eurozone. All eyes are on the European Central Bank (ECB) decision and President Mario Draghi’s press conference today.

Although the ECB is widely expected to keep rates and the the asset purchases program unchanged, Mario Draghi will likely reveal details on how the corporate bond buying program announced at the last ECB meeting would work, including some technical issues that investors are craving.

But beyond technical details, this meeting has a particular importance in terms of the general sentiment vis-à-vis the ECB’s strategy and how Draghi feels about the recent German criticism regarding the efficiency of, or lack of, monetary measures already in place.

It was clear as day that implementing negative rates would lead to a deep friction at the heart of the Eurozone countries. And this is exactly what is happening right now.

German finance minister Wolfgang Schaeuble has explicitly voiced his frustration regarding the negative rate policy (NIRP), giving a sharp warning that the negative rates could cause more damage than good.

The NIRP would also hurt the German banking system proportionally more in an economically challenging environment.

It is worth noting that the migration crisis and the Brexit talks are helping to increase tensions on the political end.

From a monetary perspective, there is little doubt that the ECB should keep its rhetoric as dovish as the market needs it to be.

Despite the extra-loose policy, there is little improvement in Eurozone’s inflation expectations. The 5y/5y inflation swaps slipped below 1.40% and Eurozone sovereign yields are lower across the board.

In this respect, two-thirds of the market is looking for more monetary stimulus in September.

The EURUSD bounced lower from 1.1388 in New York yesterday and slipped below the 1.13 mark in Asia. The euro bears are gaining ground on dovish ECB speculation before this meeting.

The positive trend momentum has been softening since the bounce back from the 12 April peak of 1.1468. Hence a fairly soft tone from Draghi could push the EURUSD down to 1.1310 - a minor 23.6% retrace on the February-to-April rally - before the major 38.3%, 1.1217.

But given how badly the recent monetary loosening measures failed to drag the euro lower, the euro risks remain two-sided.

If Mario Draghi fails to convince the market again today, the euro could well leave the 1.1468 April 12 high behind and aim for the 1.15 mark and above.