The main expectations are for further easing of monetary policy. Market participants are tuning in to dovish ECB on Thursday (12/09/2019), and will expect a rate cut of 20 points, the introduction of a new incentive system and a package of € 40 billion per month QE program.
Traders and investors will also agree to a more aggressive cut in interest rates, but more is being said about QE, given the hawkish resistance that most ECB representatives give.
Despite broad expectations, the precise decision the bank will make remains veiled in uncertainty. Mostly it is difficult to predict exactly how much interest rates will fall, but analysts forecast a major 20 percentage point reduction in interest rates on deposits to -0.60%, slightly higher than the one currently valuing the market. Given the strong negative impact this will have on the banking sector, the ECB will also need to undertake a new stimulus and relief package to balance the banking sector.
Thus, the bank will demonstrate the effect of Mario Draghi’s notorious “whatever it takes” law to reach the inflation target. It is believed that this package, coupled with a reduction in interest rates, will greatly enhance it. With regard to QE, it is also expected to be implemented in the range of EUR 30-40 billion by the end of June 2020.
And what about EUR / USD?
The euro is currently moving in a range between 1.10151 and 1.10847, with the zone at 23.6 Fibo currently also a support zone. Our expectations will come from the traditional scenario when interest rates go down and it is – the depreciation of the currency. Starting with the bearish scenario, we will expect the price to push off the zone at 1.10847 after the initial impulse, passing below 1.10405. The bears will take full control in this case and will try to drive the price to the last bottom of 03.09.2019 in the zone at 1.09324.
Alternatively, the market will play an impulse downward correction of interest rates with a decrease to 1.10151 as the last resistance zone in the narrow range and will continue the price up to 1.10847 and 1.11112 as a potential zone for bullish attack. The implementation of the QE program has always led to the appreciation of the currency, in this case combined with the reduction of interest rates would be a non-standard scenario. In this case, the market will accept the ECB’s decision as bold and bold and focus on incentives. We will expect bank stocks to suffer short-term losses as we adjust to new interest rates and the program will work.
In either case, the event will be very volatile, with a drastic decrease in liquidity up to the moment, so there is no way that the “whipsaw effect” can occur.
Trader Martin Nikolov