As we head into this month’s ECB meeting, the central bank is anticipated to signal that they are willing cut rates in 2019 and maybe introduce QE, and this could trigger a breakout in EURUSD. The Euro should react negatively if the central bank manages to surprise the market; however, traditionally, they tend to disappoint.
The main deposit facility rate has been at negative 0.4% since March, 2016, and the rates markets are projecting a lowering of the rate by 20 bps to negative 0.6% before the end of 2019.
The purpose of the rate cut is to force banks to lend out money to the struggling European economy, and to boost inflation by making it more painful to hold cash at the ECB.
Today, a large part of the cheap liquidity is not transferred to the real economy as banks instead deposit their excess liquidity at the ECB. If banks indeed lend out more to the economy, ECB hopes that economic growth and inflation will pick up.
As for the July meeting with the press conference this Thursday, the rates markets are not pricing in a rate cut, but they anticipate the ECB to signal for a rate cut in September when new staff projections are published. Some economists are also expecting a restart of the ECB’s QE program.
The restart of the QE program will probably become necessary as the ECB is considering to introduce a tiering system to help banks mitigating negative interest rates. Thus, rate cuts alone might not be enough to cause the Euro to tumble.
As for the FX markets, the Federal Reserve is also expected to reduce rates in July, and this will counterweigh the dovish outcome of the ECB rate meeting. The rates markets are projecting a Fed rate cut by 25 bps with a 75.5% probability.
Technically, the EURUSD is trading sideways between the May low of 1.1105 and the March high of 1.1446.
On a break to the upper limit at 1.1446 the price might reach the 1.1746 level, which is a target derived by taking the difference of the current 1.1105-1.1446 range.
However, if the price does not break the upside barrier, and instead slides below the May low, the price might instead drift towards the 1.0797 level, which is derived by subtracting the price range from the May low.
It would be fair to anticipate the price to trade sideways until either the ECB or Fed rate meeting cause the price to leave the range.
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