The ECB is expected to cut its benchmark rate by 50 bps to 1.00% which would be the lowest since the single currency was formed. The central bank has been reluctant to bring their rates for fear they will corner themselves if the regions economy contracts further.
Fundamental Outlook
The ECB is expected to cut its benchmark rate by 50 bps to 1.00% which would be the lowest since the single currency was formed. The central bank has been reluctant to bring their rates for fear they will corner themselves if the regions economy contracts further. However, with inflation expectations falling to 0.6%, the threat of deflation remains despite committee members continuously dismissing its possibility. There have been calls for more aggressive action from policy makers similar to the quantitative easing measures of the U.S. and U.K. Although we probably won’t see the central bank enter markets and buy government debt, expect them to extend the maturity of refinancing operations which they may announce at the post decision press conference. Therefore, traders will want to pay attention to President Trichet’s remarks which are typically more market moving then the actual release. A rate reduction in of itself should be a weighing factor for the Euro and any additionally measures announced could accelerate its decline. This would validate the bearish euro technical outlook and justify a short EUR/USD trade.
Technical Outlook
My working assumption is that a wave 2 high is in place at 1.3740 (within what will be a 5 wave decline from 1.4723). It is quite possible that 1.3740 will be the high for the year. Near term, a corrective rally may be underway from 1.3113. Expectations are for the rally to exceed 1.3343 (yesterday’s high) and top in the 1.3415-1.3450 zone. 1.3415 is former support that should now provide resistance.
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To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com
