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Euro, Yen and Aussie Dollar May See Sharp Moves on ECB Outcome

Euro, Yen and Aussie Dollar May See Sharp Moves on ECB Outcome

Talking Points:

  • All eyes on ECB as markets price in at least 10bps reduction in deposit rate
  • Euro likely to rise if QE asset purchase pace remains at €60 billion/month
  • Risk appetite to sour if ECB underwhelms, hurting Aussie and boosting Yen

All eyes are on the ECB monetary policy announcement in European trading hours. The markets are primed for stimulus expansion, but the way in which it is delivered can generate vastly different outcomes for the Euro and the broader asset universe at large.

The MSCI World Stock Index – a proxy for global risk appetite trends – has closely tracked global liquidity trends. This makes for an environment where actions judged as dovish by the world’s top central banks trigger “risk-on” dynamics that benefit equities and high-yielding currencies alike. Needless to say, hawkish outcomes have the opposite effect.

Extending the existing €60 billion/month QE effort and pushing deposit rates deeper into negative territory underwhelmed investors in December. The move brought policy rates in line with a drop in borrowing costs already priced in by investors while offering no up-front boost to asset purchases. The Euro raced sharply higher and stocks fell as a result.

This time around, traders are front-running a deposit rate cut once again. Accounting for the spread between the EONIA benchmark for EUR-based overnight borrowing costs and the ECB deposit rate, markets envision at least a 10 basis point reduction. If the ECB does not meaningfully exceed their expectations and offer a tangible boost to the size of QE asset purchases, another disappointment is likely.

Besides sending the Euro higher, such a result will probably hurt risk appetite. This may see sentiment-geared FX like the Australian, Canadian and New Zealand Dollars trade lower alongside share prices while the anti-risk Japanese Yen advances. On the other hand, a bold dovish move will likely deliver the opposite results.

Do DailyFX analysts expect the Euro to rise or fall this year? See our 2016 forecast to find out!

Asia Session

20:00NZDRBNZ Official Cash Rate2.25%2.50%2.50%
20:05NZDRBNZ’s Wheeler Holds News Conference---
23:50JPYPPI MoM (FEB)-0.2%-0.3%-0.1%
23:50JPYPPI YoY (FEB)-3.4%-3.4%-3.2%
00:00AUDConsumer Inflation Expectation (MAR)3.4%-3.6%
00:01GBPRICS House Price Balance (FEB)50.0%50.0%48.0%
01:30CNYCPI YoY (FEB)2.3%1.8%1.8%
01:30CNYPPI YoY (FEB)-4.9%-4.9%-5.3%
02:00JPYTokyo Avg. Office Vacancies (FEB)4.04-4.01

European Session

07:00EURGerman Trade Balance (JAN)17.0B19.0BLow
07:00EURGerman Current Account Balance (JAN)17.0B25.6BLow
07:00EURGerman Exports SA (MoM) (JAN)0.8%-1.4%Low
07:00EURGerman Imports SA (MoM) (JAN)0.8%-1.6%Low
07:00EURGerman Labor Costs (YoY) (4Q)-2.4%Medium
07:00EURGerman Labor Costs (QoQ) (4Q)-0.0%Medium
12:45EURECB Main Refinancing Rate0.05%0.05%High
12:45EURECB Deposit Facility Rate-0.40%-0.30%High
12:45EURECB Marginal Lending Facility0.30%0.30%High
13:30EURECB’s Draghi Holds Press Conference--High

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3

--- Written by Ilya Spivak, Currency Strategist for

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