- EUR/USD’s two-day recovery rally stalls ahead of the ECB rate decision.
- Markets expect some form of ECB intervention to cap the rise in bond yields.
- Disappointment could lead to another leg higher in yields and risk aversion.
EUR/USD is currently sidelined near 1.1932 – the 23.6% Fibonacci retracement of the sell-off from the Feb.25 high to March 9 low -implying caution ahead of the European Central Bank’s (ECB) rate decision due later Thursday.
ECB intervention priced in
The central bank is unlikely to make any changes to interest rates or the pandemic purchase program. Traders, however, will have an ear out for the bank’s reaction function to rising inflation expectations and bond yields.
According to Reuters, some analysts believe the ECB would front-load asset purchases under their Pandemic Emergency Purchase Programme to help stem the rise in yields. However, others do not expect any such changes and foresee verbal intervention by President Christine Lagarde.
Markets, however, have priced in some form of intervention, according to Reuters. EUR/USD has regained some poise this week alongside a pullback in yields. The currency pair has recovered nearly early 100 pips from the multi-month low of 1.1836 seen earlier this week.
So, if the bank fails to deliver, yields will likely rise. While that’s usually bullish for the home currency, the recent experience suggests otherwise. Equity markets tumbled in the last week of February, as yields surged, putting downward pressure on EUR/USD.
The options market, however, isn’t foreseeing significant price turbulence. The one-month implied volatility, or investors’ expectation of price turbulence, has declined to 6.25%, having recently hit a high of 7%.
Aside from the ECB rate decision, the US weekly jobless claims could influence the currency pair.
Technical levels
Share
