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The Most Likely ECB Outcome

The Most Likely ECB Outcome

Boris Schlossberg, Technical Strategist

The Australian dollar suffered yet another wave of selling this morning as the markets anxiously await ECB President Mario Draghi’s post-meeting statement, which will drive near-term euro price action.

High-beta FX was well bid today ahead of the key European Central Bank (ECB) meeting with GBPUSD clearing the 1.5450 mark in morning London trade, while EURUSD broke above the 1.3100 figure as traders awaited ECB President Mario Draghi’s press conference and the region’s sovereign bond auctions went off well this morning.

In Asian trading, the Australian dollar (AUD) saw another wave of selling, and the AUDUSD pair broke the key .9500 barrier, sinking to .9435 before finally rebounding.

Australian trade balance numbers missed their mark, but the selling was caused primarily by momentum and leveraged funds, which piled into short position once the key .9500 support gave way.

Aussie sentiment remains extremely negative as markets continue to anticipate a further slowdown in Australian growth and price in more easing from the Reserve Bank of Australia (RBA). However, having now breached the .9500 level, the Aussie may get a modicum of relief from some longer-term investors and central bank reserve diversification flows as it tumbles toward levels not seen in several years.

The Aussie has also been crushed on the crosses, as it continued to decline against the euro (EUR) and Japanese yen (JPY), but perhaps some profit taking later this afternoon will provide some short-term relief.

The Most Likely ECB Outcome

Meanwhile, in Europe, both the euro and British pound (GBP) enjoyed a well-bid night ahead of their respective central bank meetings. The pound was still basking in the afterglow of three positive data surprises, which indicate that the Bank of England (BoE) will not consider any additional easing for now, and GBPUSD climbed to 1.5450 as the morning session wore on.

The euro got a boost from better-than-expected sovereign debt auctions from Spain and France, both of which saw demand at the top of the range and yields generally declining further.

All eyes will turn to today's ECB meeting as markets await any fresh policy messages from ECB President Draghi. However, Mr. Draghi may have little new to say. Given the uptick in the latest PMI data, the governing council appears to be divided about the prospects of further rate cuts and even the idea of negative deposit rates. The latter, which was such a negative shock to the EURUSD last month, appears to be on the back burner for now.

If Draghi offers no further easing ideas and remains relatively neutral about the state of economic activity in the Eurozone, the EURUSD could extend its rally on relief sentiment, especially if the US weekly jobless claims continue to show deterioration in the labor market.

On the other hand, if Draghi paints a progressively dour picture and reiterates the prospects for negative deposit rates, the EURUSD could quickly do an about face and tumble through the key 1.3000 support. Given the latest news from the Eurozone, the second scenario appears less likely today.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.