The euro tight range trading continued for the fifth consecutive day, with EUR/USD only moving within 80 pips. The unwillingness of investors to take big trades on the single currency is justified by ECB’s monetary policy today, and everybody is seeking a hint from Mario Draghi on whether he will pull the trigger on further easing.
Looking into past Eurozone data, unfortunately the economy is not in a healthy condition.
Inflation: Prices in the Eurozone fell by 0.1% in September for the first time since launching QE and excluding energy, food, alcohol and tobacco (Core Inflation) recorded 0.9%. With prices dropping and Euro strengthening, this would drag growth further down and take the economy into deflation.
Production: Industrial production in Eurozone continues to be sluggish dropping 0.5% in August and the fourth drop since March this year.
German Data: Europe’s largest economy cannot be ignored, and when looking at latest data from Germany; exports, employment, manufacturing, factory orders, and industrial production all seem losing strength, and if the European engine is getting tired this puts the whole Eurozone into risk.
External Factors: Emerging markets weakness is also a major concern for central banks and with China exporting deflation to other developed economies, there a lot for ECB to worry about.
- Reducing deposit rates
- Increasing stimulus beyond current €60/month
- Extending QE’s date beyond Sep 2016
- Dovish statement
Euro traders are currently pricing a dovish statement to downplay any Euro strength, however if Mario Draghi decided to surprise, a cut in deposit rate would be a strong tool to pull back EUR/USD below 1.10.
According to Thomson Reuters, the median probability of ECB extending its 1 trillion euro QE program beyond its current end date of September 2016 was 70. The same poll saw a 40% chance the ECB would increase its monthly purchases over the next six months. In our views, these actions would likely take place in December after the ECB reviews their latest staff economic projections. If any of the mentioned possible scenarios happen at today’s meeting, the euro could easily lose 200 pips.
Keeping the door opened for further easing is most likely to be the case, and with markets already pricing a dovish statement it would be a difficult call for the Euro. The more dovish the more influence Draghi’s words would be on euro and vice versa. Traders should also keep in mind that FOMC will be meeting on 27th October, so expect a more volatile week ahead.