Market Alert: Will the ECB sink the euro?

With no recovery in sight in Europe the ECB once again faces a challenge – how to revive the economy. The QE program was terminated at the end of 2018 but after just 6 months traders are talking about it once more. What will the Bank do? In this analysis you will learn:

  • Why the ECB has little choice but to act
  • What options the Bank has
  • What are the most likely scenarios
  • How does the EURUSD looks from the technical perspective

Economic data - nothing to wait for

In the spring of 2018 Mario Draghi hoped that a sustained recovery would allow him to end his tenure as the ECB president who “saved the euro” during the crisis and buoyed the economy to the extent that monetary stimulus could be withdrawn. Fast forward to present and the situation is so much different. A crawling slowdown in the Eurozone had been first attributed to temporary factors but it’s clear that it’s something more serious. While the consumer holds up relatively well, inflation remains well below the target and manufacturing sends recessionary signals. Sadly for Mr. Draghi, it’s time to act again.

What options does the ECB have?

Interest rates: a deposit rate is already at -0.4% but the ECB made it clear in the past it believed deeper cuts were possible. A cut to -0.6% is possible this year, perhaps with a program that would compensate the losses to the banking sector. Negative rates were especially harmful for the euro in the past.   

QE: the ECB could easily announce a 6-months program of bond purchases of 30 billion euro per month using current limits. More aggressive QE will need either rising issue/issuer limit or broadening set of assets purchased. It’s likely to Draghi will leave it up to the next ECB president. QE was especially bullish for European Indices in the past.

3 market scenarios

Dovish – ECB cuts deposit rate by at least 10 basis points and announces QE (details could be presented in September)

Neutral – ECB cuts deposit rate by 10 basis points and doesn’t consider QE in July OR no interest rate cut but QE announced to be introduced soon

Hawkish – ECB refrains from cutting rates and only signals some kind of easing to take place in September

ECB will announce a decision on Thursday 1:45pm CEST and the post-meeting conference will start 45 minutes later.

EURUSD technical situation

The EURUSD surged in June as markets priced in easing from the Fed but a rise in expectations for easing from the ECB erased all those gains. Technically a defence of a demand zone just above 1.11 will be crucial for the pair to remain (at least) in consolidation. A clear break could initiate a fresh downward trend. The next support is at the psychological 1.10 level. (Source: xStation5)

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