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Euro: 3 Potential Outcomes of ECB Rate Decision

Monday, 03 September 2007 16:33:17 GMT  |  Kathy Lien, Chief Strategist

Next to the US non-farm payrolls report, the European Central Bank interest rate announcement on Thursday is the most important and potentially market moving event this week.

Typically the ECB lets the market know at least a month in advance what they plan on doing with interest rates.  This time however, Trichet and company will have traders guessing up to the last second. There are three potential outcomes of this much anticipated rate decision.  The first and the most unlikely is for the ECB to raise rates to 4.25 percent. This surprisingly hawkish move would be extremely positive for the Euro, taking the currency pair back above 1.3700.  The second scenario is for the ECB to leave rates at 4 percent, drop the words strong vigilance and add some other dovish comments that would allude to interest rates remaining unchanged for the remainder of the year.  This would be extremely bearish for the Euro, taking it back below 1.3550.  The third scenario would be for the ECB to leave interest rates unchanged and either keep the words strong vigilance or other equally convoluted and slightly hawkish comments, which would leave the door open for further rate hikes and be only slightly bearish for the Euro. 

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