Forex: Euro at Risk if ECB Hints at Expanded Stimulus in the Works

Talking Points:

• Euro at Risk if ECB’s Draghi Hints Stimulus Expansion Plans in the Works
• US Dollar May Rise on Upbeat ISM Data But Follow-Through to be Limited
• Aussie and NZ Dollars Declined in Asia, Soft Chinese Data a Likely Catalyst

The monetary policy announcement from the European Central Bank headlines the economic calendar in the hour ahead. Economists’ consensus forecasts point to no changes this time around and the traders are pricing in a meager 3.8 percent probability of an interest rate cut. For our part, we continue to think the ECB is waiting for its Asset Quality Review (AQR) to reveal the gap in policy transmission that prevents ultra-low borrowing costs in the interbank market from being passed through into the broader economy. Deepening disinflation may prompt a rhetorical effort however, with the Euro vulnerable if ECB President Mario Draghi overtly suggests that policymakers are drawing up plans for stimulus expansion at the press conference following the announcement.

Later in the day, the spotlight turns to the ISM Non-Manufacturing Composite gauge. Expectations point to a rebound in March after the index hit four-year low in the prior month. An upbeat outcome may fuel hopes for a reacceleration of the US recovery after the allegedly weather-induced soft patch witnessed in the first quarter of 2014. This would likely erode doubts about the continuity of the Fed’s efforts to “taper” QE asset purchases and may boost the US Dollar. Follow-through may be limited however as traders await Friday’s much-anticipated Employment report.

The Australian and New Zealand Dollars underperformed in overnight trade, with the selloff seemingly linked to disappointing economic data from China. Official Non-Manufacturing PMI data pointed to a slowdown in activity growth while a Composite PMI reading from HSBC that combines factory- and service-sector performance pointed to the steepest pace of contraction since November 2011. The East Asian giant is Australia and New Zealand’s top export market and a slowdown there carries significant spillover risk, which traders may have interpreted as limiting future RBA and RBNZ policy tightening prospects.

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Asia Session

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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