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ECB May Look at Additional Stimulus, Rate Cuts if Europe's Recovery Remains Unstable

ECB May Look at Additional Stimulus, Rate Cuts if Europe's Recovery Remains Unstable

Nick Cawley, Strategist

EUR/GBP Price, News and Analysis:

  • ECB may look at additional stimulus to boost a flagging economy.
  • EUR/GBP may drift lower, sentiment turns from bullish to mixed.
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ECB President Christine Lagarde warned today that Eurozone output would not return to pre-COVID-19 levels until the end of 2022 and that the central bank would use additional monetary policy measures, including cutting interest rates further, to re-boot the flagging economy. Speaking with the Wall Street Journal earlier, Ms. Lagarde noted that other policy measures were likely to be used before taking interest rates further into negative territory and that the central bank stood ready to address the situation ‘as it develops’.

Ms. Lagarde’s comments did little to move the Euro although her comments are likely to cap any upside in the single currency going forward. The current level of the Euro is causing the central bank a problem by pushing down on inflation to an uncomfortable level. Last week the preliminary German inflation data for September fell to -0.2% y/y, while the Euro Area reading fell to -0.3%, the steepest fall since April 2016. Additional monetary stimulus will weigh on the Euro and any weakness in the single currency will help combat negative price pressures.

EUR/GBP has traded in a sideways pattern since early-to-mid May, constrained in part by ongoing, and gridlocked EU/UK trade talks. These talks are now nearing their end game and the mood music is marginally more positive for a deal by the end of the month. The pair currently trades around 0.9085 and sit on support off the 50-day simple moving average, while the upside in the short-term is capped by the 20-dma. The pair also shows a pattern of lower highs over the last month and a break below support would see 38.2% Fib retracement at 0.9035 tested ahead of the September 28 low at 0.9028 and the round number 0.9000 level. If sentiment remains negative, the 200-dma at 0.8930 guards the 50% Fib retracement at 0.8891.

EUR/GBP Daily Price Chart (January – October 6, 2020)

ECB May Look at Additional Stimulus, Rate Cuts if Europe's Recovery Remains Unstable

IG Retail trader data shows 48.14% of traders are net-long with the ratio of traders short to long at 1.08 to 1.The number of traders net-long is 0.65% higher than yesterday and 32.01% higher from last week, while the number of traders net-short is 13.06% higher than yesterday and 9.87% lower from last week.We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/GBP prices may continue to rise.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/GBP trading bias.

What is your view on EUR/GBP – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

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

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