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Thoughts from the Trading Trenches

19 Years ago | June 01, 2014 12/2/23, 12:00 AM


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Will the ECB Go the Full Monty?

Those who have followed my articles since the start of the year know I have been saying that for the EUR to weaken it would have to come from actions by the ECB. I highlighted this in last month’s newsletter, entitled, C’mon ECB, Send Us a Signal, and this proved to a timely alert. Perhaps Draghi read my article as he did not disappoint this time as he sent a signal that the ECB would finally take steps to fight deflationary pressures by easing policy at the June meeting. While other factors may have come in to play, EURUSD threatening to take out 1.40 probably set off an alarm.

As a result, the ECB blinked and the market reacted logically by selling the EURUSD in anticipation of policy changes at the June ECB meeting. The question is now how much will be discounted by the forex market before the meeting and whether the ECB will do the minimum or take more aggressive action that includes other measures besides rate cuts (e.g. targeted lending for small businesses). This will determine whether there is a buy the rumor, sell the fact reaction or a signal to push the EUR even lower in a market that has been starved for a trend. QE is not seen as a risk at this meeting and remains a long shot down the road as well even though the threat will remain if inflation does not pick up. QE would be a trader’s dream as it would flash a green light EUR sell signal but that will likely remain locked in our trading hope chest.

The following is a list of measures the ECB can take to ease policy with some forecasts I picked up from the market.

1)    25bp cut on the marginal lending facility to 0.50%

2)    15bp cut in the repo rate to 0.10%

3)    10 bp cut in the deposit rate to -0.10%

4)    Injection of liquidity by ending sterilization of SMP

5)    Targeted LTROs

6)    Non-sovereign debt purchase program

This reads like a laundry list and whether the ECB goes the Fully Monty or typically disappoints by not going all the way will influence the market reaction.

In any case, the high for the year is likely in at 1.3996 and the search is now on for the bottom of the range. Trading ahead of this event risk has been the safer play, if there is such a word in trading, as the market factors in an ECB ease. Whether the ECB acts aggressively or does the minimum with threats of more to come will dictate whether the market expectations are met (buy the rumor, sell the fact?) or a further green light is flashed to sell the EUR. In any case, a lower range seems set and if looking for key levels, they come in at 1.3475 and 1,3295. On the upside, watch the 200 day mva (currently 1.3645) as only above it would slow the risk.

Key EUR events risks: EZ Flash HICP on June 2 and ECB meeting on June 4.

Jay Meisler, founder

Global Traders Association

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