• Share this:

Tomorrow’s  ECB rate announcement due 12:00GMT is shaping up to be one of the key events in the  central bank’s  ten year history. With Euro-zone economy facing  one of the worst economic slowdowns in decades  Mr. Trichet and the governing council are  under enormous pressure to abandon his ”Bundesbanke-like” rhetoric  and begin to ease aggressively.

The consensus is for  50bp rate cut and although we do not think that Mr. Trichet will exceed analyst expectations, we do believe he will signal a much more dovish stance going forward.  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.

Ahead of  the ECB announcement the currency market will get a glimpse of EZ CPI data for December and should that report surprise to the downside, it will open the way for ECB to act more aggressively over the next several months.  

The ECB is a notoriously conservative institution and Mr. Trichet does not like to surprise the market.  Therefore tomorrow’s Q&A session will be critical to understanding  the EZ monetary policy going forward. Although Mr. Trichet is sure to reaffirm his  statements about not “pre-committing”, if he acknowledges the gravity of the situation in EZ economy, the market will take his words as a signal of another  50bp cut within a month.

With EUR/USD having dropped substantially ahead of the rate announcement,  there is serious  possibility that that the unit could actually rally in the aftermath of the news release in a typical “buy the rumor sell the news” dynamic.  The rally could also be exacerbated to the upside, if Mr. Trichet remains stubbornly hawkish  despite the dour economic reality on the ground.  However,  with the market having reached a consensus that EZ rates must be lowered sooner rather than later, the sentiment on the single currency remains decidedly bearish  and any rally will likely prove to be an opportunity to sell as the  euro gears up for a test of the 1.3000 handle in the near future.  

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

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.