There is much speculation about what the ECB would do with interest rates, and no two economists can agree on one single outcome, however, the time to address this is here. The ECB (European Central Bank) will finally announce its interest rate decision today. The event will conclude later today with the all-important press conference.
There is some debate whether the ECB should engage in the outright buying of sovereign bonds in order to desperately fight the lack of inflation in the Eurozone areas, and if this is the most efficient way for the ECB to do what other major central banks have: Quantitative Easing. Also worth considering Beside the controversy of the measure itself, is that there is no legal framework for such a program to be launched in Europe, and this is also a hurdle.
It’s not as easy for the EU to begin a QE strategy as it is for international banks such as the Federal Reserve in the United States, the Bank of Japan, and other banks that have only one government to satisfy. With those single government countries, bonds can simply be bought.
In Europe, a number of different governments must comply, and by buying the bonds, yields go down, which can cause issues with countries within the union that have a stronger performing economy. The issue when it comes to quantitative easing in Europe is that there are multiple governments, therefore multiple voices, and a number of different objectives and requirements to satisfy.
So what is the big deal one might ask? Well, in order to answer that question, one should only look at the EURUSD as it drops like a rock all week and has seen no bounces whatsoever. At the moment of this article, the pair sits on the 1.2300 level with absolutely no sign a bottom may be in place.
Even if Draghi does not launch a full quantitative easing program, the market could still push the pair even more to the downside. There is a risk of a strong rally for the rest of 2014 in case the central bank disappoints. Judging by the latest economic data, it may even have an upbeat language in the introductory statement followed by a less dovish Draghi at the press conference. If that is the case, then the EURUSD pair should enter Friday’s Non-farm payroll above the 1.24 level and, depending on the American data, it may even recover some more.
I would say the path of least resistance from the current 1.23 level for the EURUSD, is to the upside. We estimate a jump all the way back above the 1.26 area. It remains to be seen if the market will confirm this scenario.
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Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
