- EUR/USD created a doji candle yesterday, which is considered a sign of indecision in the market place. The focus, therefore, is on today’s close.
- The European Central Bank is expected to cut outlook and announce liquidity measures.
- The EUR will likely take a beating if the ECB introduces dovish tweak to its forward guidance and announces significant downward revisions to growth forecasts.
EUR/USD created a doji candle yesterday, signaling indecision in the market place ahead of the European Central Bank (ECB) rate decision.
The central bank is expected to keep rates unchanged today and cut the growth outlook by enough to warrant new loans – long-term refinancing operations (LTROs).
The latest ECB staff projections are very likely to show a downward revision of 2019 GDP growth (1.7 percent in the December projections), according to ING. Further, the inflation forecasts are likely to keep largely unchanged at 1.6 percent, 1.7 percent and 1.8 percent for the period 2019-2021.
The shared currency will likely pick up a strong bid, if the ECB’s projections match market expectations and the central bank refrains from introducing another dovish tweak to its forward guidance, having accepted in December that balance of risks are moving to the downside. In that case, the EUR will likely close above 1.1325 (previous day’s high), confirming a bullish doji reversal.
The common currency, however, could take a beating and may close well below 1.1285 (previous day’s low), confirming a bearish doji continuation if the central bank announces a significant downward revision to 2020 and 2021 GDP forecasts and adds a dovish tweak to forward guidance, confirming market fears that the ECB may have to cut rates in the near future.
The Research Department at BBVA believes the probability of the ECB striking a cautious tone with a dovish change in the forward guidance is high as recent news have been mostly negative: disappointing macro data, inflation expectations at very low levels and growing risks due to global concerns, despite the stabilization in financial markets and the partial easing of concerns about protectionism (and more recently over Brexit).