What tomorrow`s ECB rate decision means for the EURO
- Expectations for the EUR to remain bearish
- A context of tomorrow’s Rate decisions
- Analysis of ECB major Concerns for the Eurozone
- What to expect Tommorrow
Expectations for a EURUSD correction are mounting as the pair falls to fresh lows each day. The pair, at 1.26 levels is at its lowest of the proceeding five quarters. A bullish dollar and softer economic data has seen the bears dominate this pair for the whole of the third quarter of 2014. There has not been any major retracement for the pair since July.
On a long term horizon the fundamental outlook is expected to continue for the next three quarters, the ECB cut overnight rated by 25 basis points at the beginning of September and remains dovish while speculations of a rate hike in the US by the FEB are mounting. Longer term traders that short the EURUSD are expecting to see the pair to fall below its present levels beyond the 1.25 level.
In the medium term however, we may see some whipsaw moves occasioned by profit taking near the major levels and short term speculation. Because of the fears and expectation that the pair is ripe for a major correction, any inconsistent fundamental news may cause a major counter trend move. For this reason short term and medium term traders that are short the EURUSD with tight stops may get whipsawed into loses.
Top on the ECB’s list of concerns
At 12:30 UCT tomorrow, Mario Draghi is expected to give a conference tomorrow following the ECB interest rate decision at 11:45. Markets have proved to get excited with high volatility during such conferences and as we are on the lookout for any indication of a change in policy.
Top on the agenda for the ECB will be
- The recent soft inflation data coming out of the Eurozone,
On Tuesday the European Union HICP showed that inflation in the Eurozone dropped to 0.7% a two year low. This is far below the ECB’s target of 2% annual inflation. It will be interesting to see how the ECB now assesses the situation. Lower inflation below the 2% targets implies sub-par economic activity which will exert a bearish pressure in the Euro exchange across the board.
- Weak credit outlook for the region
The Eurozone has had credit strains where there has been very low credit demand from the private sector. This is primarily because of the down turn in economic activity. A weak demand for credit makes it harder for a sovereign bank to resuscitate a weakening economy through conventional monetary policy tools. This low credit demand comes in light of a banking system transition and deleveraging efforts in the whole European baking system.
- The effectiveness of its targeted longer-term refinancing operations (TLTROs) it introduced in June.
In June the ECB introduced the TLTRO targeted at sustaining the economic activity in the Eurozone area. The TLTRO are low interest loans to help stimulate the private sector. Though not controversial the exact impact and uptake to this program is hard to anticipate fully, we hope to get Draghi’s views on how the TLTRO will be absorbed in the economy.
The ECB has shown commitment to stimulate economic growth in the EU and fight off disinflation. However as we have seen, the measures taken by the ECB are quite recent and together with other factors outside the Eurozone, they have been responsible for the weakening Euro exchange rates.
Tomorrow we anticipate the ECB interest rate decision to remain unchanged and Draghi to echo that the ECB is monitoring the situation. The Period during the speech is likely to have a higher volatility spike so it may be an unwise choice to be into short term trades. If these expectations are fulfilled we anticipate the EUR to resume its bearish moves.
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