Home ECB March Meeting: What To Expect From EUR/USD? – UOB

ECB March Meeting: What To Expect From EUR/USD? – UOB

The ECB will probably use some tools in its shed and the euro may fall, but it will not necessarily be extreme. Here is the view from UOB:

Here is their view, courtesy of eFXnews:

We remain of the view that the ECB will slash the deposit rate further by 10bps to -0.4%.  Whilst this is increasingly looking like the only major policy change that should be expected, this move has also been priced in starting right after the January ECB meeting, when President Mario Draghi suggested that the central bank would reassess its policy in March. So, if a deposit rate cut is coming on Thursday, we believe the market has already fully priced it in.

We now also expect the introduction of, or at least the announcement of the future introduction of, a tiered-rate system for the remuneration of excess reserves held at the central bank.  The main intention behind this announcement, in our view, would be to signal the potential for further rate cuts and hence an increase in the ECB’s room for manoeuvre along this dimension.

There are two ways to implement such an arrangement. First,  set a limit on the level of excess reserves that can be held on banks’ current accounts for no penalty rate. Above the threshold, a lower ‘penalty’ deposit facility rate applies.  Second,  in addition to the current deposit facility rate, add a penalty spread for deposits above a certain level. In both cases, such a move would be aimed at curbing high excess reserves whilst limiting the cost to banks which have a low level of excess liquidity…

We think EUR/USD could see some pressure as the theme of Fed-ECB divergence lingers following the recent strength in US data and the build-up in ECB easing expectations; but we do not expect the pair to move lower than the year-to-date-lows of 1.0710.

In fact, whilst the ECB is expected to act again in March, unless it unveils a new monetary policy bazooka, it could turn out to be yet another disappointing event, and this may not be enough to keep EUR/USD pinned lower for longer. Further out, we look for EUR/USD to remain rangy within the 1.0800-1.1200 region.

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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.