EUR/USD sidelined above 1.10, the bar set too high for ECB?

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  • EUR/USD lacks directional bias ahead of the ECB’s rate decision.
  • The market is priced for a 10 basis point rate cut and QE program worth €20 billion per month.
  • The EUR may rise sharply if the ECB falls short of expectations.

EUR/USD is trading in a sideways manner above 1.10 ahead of the all-important European Central Bank rate decision, scheduled at 11:45 GMT.  

The central bank is expected to cut rates by 10 basis points to a new record low of -0.50%, introduce a small tiering system, a repricing of targeted long-term refinancing operations (TLTROs) and announce a restart of the QE program worth EUR 30 billion per month from October.

Rate cut priced in

President Draghi in July said that the Eurozone’s economic outlook is getting worse and worse, setting the stage for a move in September. The market has positioned itself for the aggressive stimulus announcement.

For instance, the German two-year yield clocked a record low of -0.94% on Sept. 3 and closed at -0.84% on Wednesday.

Essentially, the yield is down more than 40 basis points from the current deposit rate of -0.40%, meaning the market is priced for more than 20 basis point rate cut and may have priced in a fresh round of QE as well.

Clearly, the bar of expectations has been set high and there is a high possibility of the QE program falling short of expectations. Moreover, the hawks may play spoilsport, after all, bond purchases may not be effective with the bond yields trading at record lows in the negative territory.

Put simply, risks for EUR/USD are skewed to the upside. The common currency, however, may break below the recent low of 1.0926 if the ECB launches a bigger-than-expected QE program and cuts rates by more than 20 basis points.

The dovish expectations will likely be bolstered if the German consumer price index, scheduled for release at 06:00 GMT, prints below estimates.

Technical levels

 

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