European stock markets headed mostly lower on Thursday, with traders staying on the sidelines ahead of a closely watched meeting at the European Central Bank that could shed some light on the bank’s tightening plans.
A stronger euro also weighed on the European markets, with the shared currency continuing its march up to trade at a three-year high.
What are markets doing?
The Stoxx Europe 600 index SXXP, +0.01% fell 0.2% to 400.10, building on a 0.5% loss from Wednesday and heading for its lowest close in a week.
Germany’s DAX 30 index DAX, -0.14% gave up 0.4% to 13,363.72, while France’s CAC 40 index PX1, +0.36% inched 0.1% higher to 5,499.28.
The U.K.’s FTSE 100 index UKX, +0.13% fell 0.1% to 7,638.19.
The euro EURUSD, +0.0886% stayed strong against the dollar, buying $1.2412, up slightly from $1.2410 late Wednesday in New York and trading around the highest level since December 2014.
The pound GBPUSD, +0.1615% rose to $1.4259, compared with $1.4238 on Wednesday.
What’s driving the markets?
Investors were waiting for the ECB to announce its rate decision and not least for the central bank’s press conference where President Mario Draghi will discuss the outlook for monetary policy.
After a string of strong economic data — like the composite purchasing managers jumping to a nearly 12-year high on Wednesday — pressure is mounting on the policy makers to roll back their ultra-accommodative easing measures. The deposit rate currently stands at negative 0.4% and the refinancing rate at zero, and the ECB also buys €30 billion in bonds a month.
Read: Things are going GREAT in the eurozone — so why isn’t the ECB raising rates?
However, with inflation still below the bank’s target and the euro continuing to spring higher, Draghi & Co. need to strike the fine balance of tightening without strangling the region’s upswing. That’s why analysts predict no action at this meeting, but instead expect Draghi to strike a relatively dovish tone to talk down the euro.
The rate decision is out at 12:45 p.m. London time, or 7:45 a.m. Eastern Time, followed by Draghi’s press conference at 1:30 p.m. London time.
A stronger euro can hurt exports and weigh on inflation, potentially hurting the recovery.
The euro has moved significantly higher recently and is now up 5% against the dollar in 2018 alone. The shared currency got an extra shot in the arm on Wednesday after U.S. Treasury Secretary Steven Mnuchin said a weaker greenback is good for trade.
What are strategist saying?
“With an aggressively appreciating Euro complicating the ECB’s efforts to hit the 2% inflation target by making exports less attractive and imports cheaper, doves could easily make an unwelcome appearance,” said Lukman Otunuga, research analyst at FXTM, in a note.
“Any signs of Mario Draghi adopting a dovish stance and verbally intervening, could expose the euro to downside risks. Market expectations are heated over the central bank ending QE before year-end and today could be a good opportunity for Draghi to cool these speculations,” he added.
What stocks are in focus?
Shares of Nordea Bank AB NDASEK, -3.94% lost 3.4% after the Scandinavian bank posted a 43% drop in fourth-quarter profit.
Aryzta AG ARYN, -21.09% sank 20% after the Swiss baker company issued a profit warning, partly blaming “Brexit-related pressures” on its U.K. business.
Clariant AG CLN, -9.06% slid 5.9% after Saudi chemicals company SABIC’s disclosed that it has purchased of a roughly 25% stake in the Swiss chemicals company.
On an upbeat note, Diageo PLC DGE, +0.88% DEO, -0.99% rose 0.9% after the drinks company posted a 6.2% rise in pretax first-half profit and said the U.S. tax reform will reduce its overall tax rate.