European Central Bank’s Interest Rate Preview

The most important economic event of the fall comes this Thursday. The European Central Bank (ECB) is poised to change the monetary policy for the Eurozone area, with all eyes on the Euro’s reaction.

It’ll be a landmark decision, as the central bank will alter the bond-buying program further. As always, it’ll do it in such a way to please both hawks and doves.

Almost a year ago, in last December, the ECB started a controversial process: scaling down the bond-buying program. To avoid the taper tantrum caused when the Fed began the same program, the ECB vowed to better-communicate its decisions and to exit the stimulus gradually.

It is no wonder, as the Eurozone economies perform better. Negative rates won’t fit the bill anymore.

With PMI’s (Purchasing Managers Index) pointing to stronger growth in both manufacturing and services sector, and with the unemployment rate looking better and better, the hawks in the Governing Council will try to push for a further stimulus reduction. However, if last December was confusing, expect this decision to be the same.

Current ECB Bond-Buying Program

Under the current program, the ECB buys 60 billion Euro worth of bonds each month. It announced the decision in December 2016 when it created much confusion: while it reduced the program from 80 to 60 billion a month, it extended it for a further nine months. Therefore, the question on everyone’s lips was: is the ECB tapering, or not?

Almost nine months later, this Thursday we should see something similar. The market consensus is for the ECB to reduce the bond-buying program with a further 30 billion/month. That’s tapering!

However, the central bank may pull another stunt and extend the horizon for a further nine months or so. As such, instead of abruptly ending the program, the ECB, while tapering, takes the foot off the gas slowly, not to disturb the markets.

As such, both bulls and bears will have something. The first ones will argue that the ECB reduces the stimulus as now they’ll buy fewer bonds. The other ones will say that fewer for longer is still easing and they’ll sell the Euro.

Long story short, expect the market to be volatile surrounding the press conference.

Euro Ahead of the Event

Euro traded in a range ahead of most of the other currencies for the past month or so. The best one to illustrate this is the EURUSD pair: it stays above 1.17, but below 1.19 for the same period.

Technical traders look for the range to break, with probably pending orders on both sides of the market. Fundamental ones, though, will wait to see the ECB decision. Therefore, it is unlikely that the pair will move much until the release.

The other Euro pairs had a similar trajectory. Ranging seems to be the name of the game, with EURGBP. EURAUD and EURJPY leading the way. Not even Mr. Abe’s re-election wasn’t enough to send the JPY pairs higher.

Conclusion

Expect the Euro pairs to range until Thursday’s event, and to break the ranges shortly afterward. The importance of the ECB communication strategy is obvious via the small ranges the Euro pairs held.

Moving forward, as we get closer to the end of year trading, there’s still time for some critical market moves. Market participants have an eye on the U.S. monetary policy too, so ending on the right side of the market may be a bit trickier this year.