And now, the economic event that almost every trader has been waiting for… the ECB interest rate decision! Will they ease? Will Draghi disappoint? Will it be a bloodbath for the euro?
As I discussed in my central bank statements preview this week, Governor Draghi has already hinted that the ECB would be ready to ease if inflation forecasts are weak. After all, the euro zone is facing the prospect of deflation, as weaker price pressures could wind up hurting domestic demand.
This downbeat sentiment was echoed by the Bundesbank or German central bank, which used to be one of the most hawkish central banks in euro land. Apparently, Bundesbank officials are ready to support aggressive and unprecedented measures that could stoke inflation in the region, even if this means seeing negative deposit rates or additional LTRO.
Earlier this week, the release of the German preliminary CPI reading revealed that deflation is becoming a very real threat in the euro zone’s largest economy. After showing a 0.2% decline in price levels for April, the report followed it up with a 0.1% drop in inflation for May instead of showing a 0.1% rebound. Traders took this as a sign that the region’s CPI estimate is likely to get downgraded – and it did!
With that, it’s highly probable that the ECB would whip out its monetary easing tools and put them to work. Some say that the ECB could cut the benchmark rate from 0.25% to 0.10% while others believe that increased bond purchases are more likely. Either way, the euro isn’t gonna be partying after the announcement.
Or is it…?
A quick look at the 4-hour forex chart of EUR/USD suggests that ECB easing has already been priced in almost a month ago. From the moment that Draghi suggested that CPI downgrades could force ECB policymakers to ease, EUR/USD has sold off aggressively and has erased more than half of the gains it chalked up so far this year.
Recent events, such as the release of Germany’s preliminary CPI and the region’s inflation forecasts, supported the possibility of ECB easing but it appears that the euro hasn’t been reacting so dramatically. Could this be an indication of a “buy the rumor, sell the news” situation about to unfold?
Take note that, with expectations running high for aggressive stimulus efforts, the chance of getting disappointed is also similarly high. A conservative move from the ECB or reassuring remarks from Draghi and his men might even lead to a euro bounce, as traders book profits off their short positions.
Do you think the ECB statement will wind up hurting the euro or giving it a boost? Let us know by sharing your thoughts in our comment box or voting in our poll below!