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Research Note: ECB Meeting a Likely Catalyst for More EUR Weakness
Jacob Oubina, Currency Strategist
Commentary: The European Central Bank is expected to cut its target interest rate to 1.00% from 1.50% on Thursday, April 2nd, at 1145GMT. The forecast is a bit contentious, with some economists looking for a less aggressive -25 basis points cut while a minority actually see the ECB standing pat on rates. We think the overwhelming likelihood is that the bank does the full -50 basis points, in an effort to not be perceived as being even further behind the curve. If the bank cuts as expected, the main focus will once again be on the press conference at 1230GMT.
ECB President Trichet provided little in the way of a preview when he testified before the European Parliament Economic Committee earlier this week. However, there is speculation that the bank will announce some form of quantitative easing at the upcoming meeting and market participants will be keenly watching for this. Indications are that the bank will extend the terms of loans to major eurozone banks and that they may buy corporate debt to ease strains on firms facing difficulties in securing credit. ECB members alluded to some of these measures last week when they mentioned the possible purchase of private debt.
Ultimately, it could well end up being a lose/lose situation for EUR. If the ECB does announce some form of balance sheet expansion, the EUR is likely to come under renewed pressure on the notion that the bank is now printing money. We would expect the negative EUR reaction to mirror the downbeat reaction in USD when the Fed announced their quantitative easing initiative a few weeks ago. If the ECB fails to announce measures beyond a rate cut, the market is likely to exact punishment on the EUR just as well. Traders will probably view the unwillingness to act on this front as a prescription for an even weaker economy going forward.
Trading Strategy: The overall strategy remains to sell EUR on strength rather than buy it on dips. If the ECB cuts rates by the expected -50 basis points and indicates that aggressive quantitative easing is on the horizon, we would expect EUR to head markedly lower. The latest hourly consolidation in EUR/USD can be approached in a couple of ways - as a pennant consolidation or a symmetric triangle consolidation. The former would project EUR/USD down to 1.2700 eventually, while the latter points to a more modest correction to 1.3000/1.2970. The break level comes in by 1.3180 for both patterns. If the ECB does not announce quantitative easing, the move lower could stall into the 1.3110/00 zone. Moves higher, meanwhile, should find a good barrier into the 1.3280/90 and 1.3340/50 zones.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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