Euro: How Will The ECB Rate Decision Impact EUR/USD?
The euro continued its descent on Wednesday, getting a little help from the release of German factory orders, which plunged 2.9 percent during the month of June.
With the European Central Bank announcing their rate decision on Thursday morning, weak Euro-zone data has had a bigger impact on the currency. While indicators have generally signaling that the region’s economy is slowing quite a bit, it will not be enough to lead the ECB to consider cutting rates as they are widely expected to leave rates steady at 4.25 percent after hiking by 25bps in July. The rate announcement will come at 7:45 EDT, but the big show is at 8:30 EDT when ECB President Jean-Claude Trichet will give his monthly press conference. Currently, overnight index swaps are pricing in a very small chance of a rate cut within the next 12 months, but the recent moves in EUR/USD have more to do with the fact that traders are also pricing in rate increases by the Federal Reserve during the same period. Yet, if Mr. Trichet’s commentary is hawkish enough to convince the markets that they have no intention of reducing rates anytime soon, the euro is likely to subsequently gain. However, it may take particularly strong words to ignite a significant rally for the currency, such as references to the ECB being in a state of “heightened alertness.” On the flip side, if Mr. Trichet focuses more on monetary policy being appropriately accommodative, suggests that inflation pressures could ease in coming months, or sounds significantly more bearish on the Euro-zone economy, EUR/USD could continue to fall. My bias for Thursday: EUR/USD could rally on Mr. Trichet’s comments, but the gains may be short-lived. According to FXCM SSI, forex traders are net long EUR/USD, and since the index is a contrarian indicator, the trend for the pair likely remains bearish. For more on the upcoming meeting, check out our Forecast for Euro, British Pound Ahead of ECB, BOE Rate Decisions.