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#1 10-09-2019 10:11:41

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From: Paris - France
Registered: 21-12-2009
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Thursday ECB meeting: bank forecasts on expected EUR/USD reaction

Thursday ECB meeting: bank forecasts on expected EUR/USD reaction

The European Central Bank will hold its next meeting in 2 days, which will be a major event for the markets.

The consensus is that the deposit rate will decrease, but there is disagreement on its magnitude. The debate is even more intense regarding a potential for more QE.

Uncertainty is therefore high at this stage. In this context, we offer you an insight from a few banks, then our opinion on the potential reaction of the currency pair according to the different possible scenarios:

TD Securities forecast

"We are on the verge of a 20-basis point decrease in rates, along with the introduction of a tiered system, as well as €40 billion per month of QE," say TD Securities analysts.

"We are more comfortable with our prediction of a more aggressive rate cut, but there is a lot of uncertainty about possible QE, given the opposition of some of the most hawkish members of the Central Bank's board of directors."

BBVA's forecast

Sovereign bond yields rose yesterday as investors lowered their expectations that the ECB would launch a major stimulus plan this Thursday at its meeting, according to their analysts. They point out that the market does not incorporate the possibility of immediate QE, but that a 10-basis point decrease in the ECB's deposit rate is a certainty. They expect rates to fall by 20 basis points.

"We expect the ECB to reduce the deposit rate by 20 basis points to -0.60%, and announce a new QE cycle, or indicate that the QE may be triggered soon. We anticipate this package due to worse than expected data in Germany, a slightly weaker dynamic in this year's second semester and the intensification of downside risks (escalation of the US/China trade war and Brexit)".

"The updated forecast is likely to revise GDP growth from around 0.2 percentage points in 2020-21 to 1.3% after 1.1% this year and core inflation by around 0.1 percentage point over the forecasted period to average around 1.5% in 2021."

How will the pair react to the meeting?

If the ECB simply lowers its deposit rate by 0.1%, without committing to more monetary policy measures, the euro could rise.

If the ECB lowers its rate by 0.2% without launching QE, a temporary decrease can be expected.

Finally, if the ECB lowers its rates, and also launches QE and/or makes a firm commitment to further ease policy by the end of 2019, a sharp decline should be anticipated for the eurodollar pair.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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