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Euro Spiky Ahead of ECB Decision

Last updated 1/15/2009 4:50 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

The EUR/USD traded on either side of 1.3200 level for most on the night in chopppy Asian and European trade as currency markets awaited the ECB interest rate decision due later today at 12:45 GMT.  In a true testament to the confusion of the marketplace the estimates for ECB policy move vary from the low end of 25bp to a high of 75bp.  

Should the ECB deviate from the broad consensus of 50bp rate cut, it will most likely cause a spike in the euro as traders adjust to the surprise, but the longer term price action in the pair will be determined by President Trichet' s commentary at the post meeting press conference at 13:30 GMT.

As we noted yesterday, we believe that he will signal a more dovish stance going forward.  We wrote, "over the years, one of ECB's principal concerns in managing the Eurozone monetary policy has been price stability.  To that end ECB has always erred on the side of caution and as result has maintained its rates far higher than its G-4 counterparts.  Presently EZ rates are more than 200bp higher than those of  US  and Japan and 100bp higher than the rates in UK.  However, with the latest German whole sale price data printing at -3.0% (far below the consensus estimates of -1.7%) any lingering doubt s about inflationary pressures  in the region have long been extinguished and the market now expects the ECB to come in line with the  rest of the  G-4 central banks."

Meanwhile the pair may also be affected by US data due later in the North American session. The weekly jobless claims, as well as Empire and Philly Fed surveys should provide some clue as to the state of the US economy. Most importantly, traders will look for any signs of stabilization. Few market participants expect the economic news to be positive and simply hoping for some sort of a bottom to set in.

However, if the data  continues to disappoint to the downside, the euro may get a lift on relative basis. The dollar bulls primary argument for the long greenback position has been  based on the idea that US economy will rebound first. But if the US data today shows further deterioration the euro may gain some ground simply on the basis of being the best of the bad alternatives for the time being.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.