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ECB Talking Points:

  • The ECB rate decision is scheduled for 12:45 GMT and President Draghi's regular press conference will follow 45 minutes later
  • While the central bank will not change rates, it has said it would end its QE program this month
  • Forward guidance will play a crucial role after the BOE and BOC downgraded their views and the Fed is expected to do the same

See how retail traders are positioning in EURUSD, EURJPY, EURGBP, other FX majors, indices, gold and oil intraday using the DailyFX speculative positioning data on the sentiment page.

There is a Lot on Euro Traders' Minds

In fundamental trading, it is important to assess what is most influential in a currency or market's backdrop so as to better establish where motivation will arise. That seems a particularly difficult prospect at the moment for the Euro. There are multiple fundamental pressure points for which the market is currently applying tension. For sheer headline weight, the ongoing negotiations over the UK's withdrawal from the EU have generated greater interest. With Prime Minister Theresa May surviving a no-confidence vote, there remains little clarity on how the split will work as the deadline fast approaches. A disruptive Brexit would be a troubling development for the Euro just as surely as it would be for the Sterling. Another issue garnering less immediate attention but is nevertheless critically important is the simmering trade war risk the EU faces with the US. The threat of auto tariffs hangs in the air and news this past session that the Trump administration rejected the EU's trade reform proposal should remind us of the lingering threat of precarious left turn on policy. A more recent issue that will carry us into an important update into Thursday's session is the discussion of budgets among the EU members. Italy has recently softened its budget target, but the EU may still demand deeper cuts. France on the other hand is clear on its course to break the 3 percent threshold. An EUCO meeting tomorrow will weigh in on this theme directly. However, it will likely still fall short of the influence of the ECB rate decision.

EUR/USD Chart

An ECB Rate Decision that Will Draw Fed-Level Attention

ECB Policy is Important to the Euro's Defiant Buoyancy

The European Central Bank (ECB) is due to announce its monetary policy decision at 12:45 GMT. That will be followed a short time later by President Mario Draghi's press conference. The decision itself is likely to be innocuous to those that don't know what to look for. There is virtually no chance of a change to the benchmark rate considering the group is still coasting with a holding pattern on the lowest yield on record. A legitimate shift is expected, however, in the central bank's stimulus efforts. They stated clearly at the previous meeting that they intended to tie off QE (quantitative easing) purchases at the end of the year to call to a symbolic close its most dovish policy in its history. Not following through on this anticipation would hold fairly severe consequences to speculative reach and a distinct Euro response (bullish). All told, the most important tool to keep close watch on is forward guidance. This has been the favorite tool of the largest central banks as of late owing to its fine tuning, an easy backtrack and its sway over speculation. It is the ability establish a market response through mere speculative anticipation that makes this such an appealing tool at this point of systemic transition from a decade of extreme accommodation. Given its use with the Fed, this will be a favored option for the ECB to explore. Therein lies the problem. It seems Fed officials have recently started to soften their tone and the probability of a downgraded growth forecast next week is rising. The Bank of England and Bank of Canada have made an explicit effort to lower the guylines. Considering the Euro is still holding on to much of its premium from 2017 - where the market speculated on an eventual hike from the ECB which fostered appetite to catch a situation similar to the Dollar back in 2014 - there is room for loss.

Major Central Bank Balance Sheets Chart

An ECB Rate Decision that Will Draw Fed-Level Attention

What Would Bullish and Bearish Scenarios Look Like, and Which Pairs are Best Suited?

In evaluating the ECB rate decision, the general trajectory still seems to be one of bullish interest. We have yet to see the first hike from the group, so it isn't a course that could be fully discounted. There is still capacity for a hawkish outcome, but we should only entertain a reasonable scenario. A hike is not even close to practical. Instead, holding course by ending the stimulus program and making no effort to quell the market's anticipation of the eventual move would be construed as a bullish outcome. After the retreat of the past few months, there is room for the currency to recover lost ground. A bearish course would be one where the group decided to extend its stimulus through its existing QE or adopting an LTRO and/or offering up language that made it clear the eventual first hike would be pushed beyond the 2019 time frame for which the market currently anticipates action (in the third or fourth quarter). For a bullish outcome on the Euro, I would consider EURUSD and EURCAD thanks to their respective counterparts undergoing policy downgrades. On the bearish side, EURCHF is one of the most appropriate pairs to project an unencumbered drive while EURAUD is a particularly over-drawn pair. We focus on the ECB rate decision in today's Quick Take video.

EUR Index Chart

An ECB Rate Decision that Will Draw Fed-Level Attention