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
No comments:
Post a Comment