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ECB Quick Preview: 2 things to watch – downwards

The short version: no changes are expected in policy and this means that the euro could  fall after getting a boost by the weak US retail sales.

The longer version: here are two things to watch out for, and these could  significantly impact the euro in both directions:

1) QE program prospects:

The situation in the euro-zone is improving: Germany is enjoying falls in unemployment, Spain sees stronger growth, PMIs are moving up and everything seems better than just a few months ago. Even inflation came out stronger than expected. The ECB already raised forecasts in March.

Is it time to party and begin thinking  about the beginning of the end of QE before September 2016?

Not at all.

Draghi clarified that the optimistic forecasts depend on implementation of the program. This is way too early to make changes. The recovery is in the incubator and is extremely fragile. The recovery depends on a weaker euro and Draghi would not like to undermine this.

So,  there is a high probability to see more Draghi determination that will hurt the euro and a small  chance to see winds of change (that would boost it).

2) Negative  deposit rate cut?

If the ECB continues pushing ahead with QE at full steam, some fear it could run out of bonds to buy. So far, everything is going as planned, with bonds yielding negative interest rates also on the table. The ECB set the  limit to -0.20% – its negative deposit rate.

In the past, Draghi said that interest rates  have reached their lower bound. But the times have changed.

Will the ECB lower the interest rate in order to buy more bonds.

Not so fast.  

They still have time for that. There is a high probability that this option will just be mentioned but implementation is far.  This would be euro positive.

In the unlikely case of a hint about an imminent cut, the euro would plunge.  The negative rate is already pushing money out of the euro-zone.

All in all –  the most likely scenario is more pressure on the euro, but nothing extreme. This doesn’t mean lack of action and wild trading, but a big leap or a big plunge depends on changes which are unlikely.

More:  EUR/USD: Towards 1.15 Or Below 1.00 – JP Morgan

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.