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4 Scenarios for the ECB: Negative rate to be put

The European Central Bank is not expected to change any of its interest rates this time. Last time, ECB President Mario Draghi talked about open-mindedness towards a negative deposit rate.  Given recent various statements, this will not happen now and the euro has already risen in anticipation for no cut.

This raises the downside risk in case of a surprising move. Here are four scenarios for the rate decision and possible outcomes for EUR/USD:

Update: ECB leaves all rates unchanged, EUR/USD higher. Scenario number 4 is now irrelevant. All eyes are on Draghi.

Follow a live blog of the ECB press conference

Update: Draghi put the negative rate talk on the back burner and sent the euro higher

Last time, the ECB cut its main lending rate from 0.75% to 0.50%, and left the deposit rate unchanged at 0.50$. This was different than the cut made in July 2012, when the central bank lowered both interest rates by 0.25%.

In the press conference following the decision, Draghi suggested that the ECB is ready for negative rates, and especially ready to mitigate the negative effects. This sent the euro quickly lower.  However, this seems quite unlikely now after various statements.

Let’s see the scenarios:

  1. No cut, continued worries about the economy and continued openness to a negative rate: This is the most likely outcome. The ECB will probably stay put on all fronts. The economies of the euro-zone haven’t really recovered since the last decision and inflation remains depressed. Leaving the negative deposit rate door open leaves some desired pressure on the euro, but could also be seen differently: as crying wolf. If the ECB just talks in the same tone and doesn’t do anything, the markets could think that the negative rate is off the table.
  2. No cut, optimism about the economy: This also has good chances, as Draghi tends to change his mood between decisions. He could find signs of optimism and practically lift the euro. While leaving the door officially open for a negative interest rate, markets would see a shut door in case of optimism and the euro could leap.
  3. No cut, but negative rate incorporated in the statement: the openness for a negative rate was made only in an answer to a question. If Draghi says that the ECB is considering a negative rate in the official statement, it would be seen as an escalation and the euro would suffer. It would indicate that a negative deposit rate could happen as soon as July. EUR/USD would suffer. Chances aren’t high.
  4. Negative deposit rate: In case the openness materializes into a decision, the euro will undoubtedly plunge: not only because such a thing would scare money out of the euro-zone, but also because it isn’t priced in. Chances are low.

The rate decision will be made at 11:45 GMT, and the press conference is held at 12:30 and usually lasts about an hour.

What do you think will happen?

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Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.