Today is an incredibly important day for currency traders. It is today that we will learn about the European Central Bank‘s monetary policy stance. The euro is trading flat ahead of this important announcement, and for the last few days, we have seen persistent weakness for the Eurozone’s single currency.
The Big Question
Traders are asking how dovish the ECB’s monetary stance will be today, and whether the ECB is going to lower the interest rate – which is already sitting at a record low level.
However, weak inflation has become a major problem for the ECB, and in order to address this issue, the bank needs to do something.
Otherwise, inflation in the Eurozone is likely to remain lifeless, and the ECB can completely forget about achieving its target.
Money Market
The money market is expecting the ECB to lower the interest rate, but that action isn’t expected today. Traders are anticipating this to happen sometime next year. They feel that the ECB could still push the interest further into negative territory by at least another ten basis points, to -0.60%.
What Is Expected?
We are expecting the ECB to make more of a dovish statement today.
Prepare For the Unexpected
Be prepared for the unexpected; central banks never fail to surprise the markets. Even then, lowering the interest rate today remains a remote option. Traders believe that the ECB is more likely to lower the interest rate if the coronavirus situation worsens once again in the EU, and if the whole of the Eurozone comes to a halt like before.
It is possible during the flu season; that the second coronavirus wave could get out of control. However, it is expected that we will have a vaccine by then, and strict measures with respect to Covid-19 are likely to keep us away from a full lockdown like before.
Laggard Likely to Be Dovish
Christine Laggard, the European Central Bank President, is likely to sound dovish today for a number of reasons. Firstly, it is about the volatile economic data. The second-quarter numbers were off the charts, and the third-quarter numbers are highly volatile.
The best we can say about the health of the Eurozone is that there is a gradual recovery, and even this might be a stretch. In reality, the Eurozone’s economic conditions are still very fragile, and the recent surge in coronavirus cases has made matters more challenging. Relying on some of the strong positive economic readings could be troublesome for the ECB. Hence, the bank needs to sail carefully through these shores.
Secondly, inflation is not going anywhere in the Eurozone. This means that the bank is likely to lower its inflation target once again. In addition to this, there could also be a change in language with respect to their PEPP program, which currently states that 1.35 trillion euros represents a ceiling. The language could change from ceiling to target.
Finally, we have Brexit, and it is a given that there will be an adverse influence on the Eurozone’s economy as well. Christine Laggard needs to make sure that the Eurozone is ready to deal with this.
What About the Currency?
So, what does all this mean for the Euro-dollar pair?
Well, if the ECB lowers its inflation target and strikes a pessimistic tone about the economic situation in the Eurozone, the euro could really fall off a cliff. This means that the euro-dollar pair, which is currently trading at 1.1824, could easily fall all the way to 1.1650 or even lower.
On the flip side, if the bank shows its confidence in the current economic conditions, it is likely that the euro-dollar pair may continue its upward move towards the 1.20 mark once again. The chances for such an event taking place are minuscule though.