LONDON: The euro could come under renewed pressure against the dollar after Thursday's European Central Bank (ECB) policy meeting, but the driver may end up being demand for the greenback rather than anti-euro sentiment.
However, the move may not be instantaneous.
If forex traders go into the ECB meeting pre-positioned for a fall in the euro versus the dollar, only to find everyone else had the same idea, they may end up having to buy back those euros if new sellers fail to emerge.
Tuesday's dive in May's euro zone inflation to 0.5 percent from 0.7 percent in April has surely sealed the deal for the ECB to take steps to stimulate economic activity and head off deflationary pressures. But the market will presumably have factored at least some of that into the euro's price before Thursday.
The risk then is the ECB delivers measures that merely match the market's expectations, and that the central bank might succeed in removing reasons to go long of euros but not generate momentum for traders to sell the single currency afresh.
A market short of euros into the ECB meeting might end up having to buy them back because the measures lacked the "shock and awe" factor which would tease out renewed selling of the single currency.
But any such price action on the day should not detract from the fact that, comparing the euro zone to the United States, both inflation and central bank rhetoric are moving on different paths, which should ultimately favour the dollar.
One ECB measure could be to move to a negative deposit rate, charging investors to park cash at the central bank, which might prompt a partial exodus from Europe's money market funds in search of a positive return.
With some 850 billion euros held in such funds, the magnitude of any resultant capital dispersal could weigh on the euro if the flow takes those investors into other currencies.
Such funds could move into dollars.
Contrast May's 0.5 percent euro zone inflation print with Friday's April 1.6 percent year-on-year U.S. Personal Consumption Expenditure (PCE) inflation measure, which was up from 1.1 percent in March.
U.S. Federal Reserve officials keep a close eye on PCE data, and it was referenced on May 20 when New York Fed Chief William Dudley said he expected U.S. inflation to drift higher over the remainder of the year.
Dudley also said the U.S. central bank's 2 percent inflation target was not a ceiling, but for the purposes of seeking a direction for the value of the euro versus the dollar, on prices, the Fed's eyes are up while the ECB's gaze is down.
While Fed officials have fretted that U.S. inflation is well below their 2 percent target, signs it is ticking up allows the central bank to ponder how best to normalise the extraordinarily easy U.S. monetary policy.
The ECB, meanwhile, is looking at more ways to ease policy.
Traders should look beyond the sound and fury of Thursday's ECB meeting, as, regardless of what is announced, contrasting inflation prospects and the nuance of central bank policy, should mean the dollar looking up against a downcast euro.
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