Preview of ECB Meeting and Interest Rate Decision: EURUSD In Focus

Summary:
• ECB decides on the interest rate and the PEPP tomorrow, and this could have implications for the EURUSD in the medium and long term.

The European Central Bank meets to decide its interest rates as well as any possible adjustments to its PEPP program. Interest rates are likely to be kept on hold. Still, the emphasis of tomorrow’s statement and press conference will be the Pandemic Emergency Purchase Programme (PEPP), which analysts are predicting will be increased. 

Germany and France are leading a coalition to create an economic recovery fund of €500bn, with the possibility of adding €250bn to take the total figure of an expansion to €750bn.

The current PEPP runs out in October 2020, which is why there are efforts to create an additional funding window to expand the program and keep it running until mid-2021. 

The general market consensus is for the ECB to increase the size of the PEPP. The key questions are when this happens, and by how much. €250bn seems to be the consensus. So how will this play out?

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Outlook for EURUSD from Tomorrow’s Decisions

The August and December 2019 highs at 1.12265 provide a resistance that the EURUSD is challenging presently. Long-term, the EURUSD is still technically in a downtrend, with the latest price surge merely constituting a pullback rally. Whether this rally continues or not depends on the outcome of tomorrow’s meeting and press conference. 

The extent of the increase and the duration of the program will determine the EURUSD response to the news. 

– Increase of €250 billion for the PEPP alongside a commitment to expand this as needed could leave the EURUSD with little room for further upside movement. 

– Increasing the PEPP by €500 billion and running the program till 2021 allows the EURUSD a chance at targeting 1.12882 or 1.13282.  

– If the ECB adds €750 billion to the PEPP and runs the program until 2021, this could provide a major boost for the EURUSD. A run to 1.14161 cannot be ruled out (see chart). 

– A delay in the decision until the next meeting or just before the current program runs out in October could disappoint the markets. A pullback on the EURUSD may then ensue, allowing the pair to retest the 1.11667, 1.11442, 1,11023 or 1.10630.