Tuesday, June 3, 2014

Euro zone easing is priced in | Risks around the ECB announcement Thursday

The Euro – dollar pair (EURUSD) has been falling steadily for the past month, but has now come to rest in a zone of consolidation which is bounded by its 200 DMA and the support that has been established in the 1.3586 region. The fall was in anticipation of measures that look likely to be taken by the European Central Bank designed to raise inflation, which is seen as dangerously low in the Euro area. These measures could include a further reduction on the core interest rate; a form of Quantitative Easing (QE) where the ECB would effectively print money in order to stimulate spending; or a reduction of the overnight deposit rate, the amount that banks are paid for deposits with the ECB, into negative territory.

A decision on the action to be taken will be announced tomorrow (Thursday June 5th) after the regular monthly ECB governing council meeting.

Earlier this week the inflation figure for the Eurozone on a year by year basis was reported. It came in at 0.5% as against an expected figure of 0.7%, already too low for the Central Bank’s liking. So why did this development not cause the Euro to weaken further? After all, low inflation is the reason the easing measures are being considered.

Risks around the ECB announcement Thursday

The answer to that question points to the risks associated with the scheduled announcement tomorrow: The fear is that all possible easing measures have been priced in. This means that the large institutions that move the market have gone short on all the euros for which they have an appetite, and there are no more sellers of consequence left. The ultimate outcome of all this could be that if the ECB does not take the most stringent measures to stimulate tomorrow, these entities will unwind their positions, and the Euro could actually surge upward as a result.

© OmiCronFX Limited

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