ECB meeting preview: ECB expected to ease amid coronavirus slowdown

Will the ECB act to help boost the eurozone amid a widespread coronavirus crisis?

When and where?

The second European Central Bank (ECB) meeting of 2020 will take place at their Frankfurt headquarters on Thursday 12 March.

What can we expect from the ECB?

Worries over the slowdown centred around global trade have shifted very swiftly to a huge looming threat that the coronavirus will drive a global recession. The Italian lockdown has sparked fears over a potential economic collapse in Europe as the likes of Spain, France and Germany see their cases gradually increase.

From a monetary policy perspective, we have seen action from the likes of the Federal Reserve (Fed), Reserve Bank of Australia (RBA), and Bank of China (BoC), which all cut rates over the past week. That could put pressure on the ECB to act, in a bid to arrest the appreciation we are seeing in the euro.

Nevertheless, the actions of the Fed provided us with proof that many view monetary policy as a relatively blunt instrument when it comes to dealing with a health crisis such as the coronavirus.

The combination of supply-side and demand-side economic shocks are better suited to fiscal actions, as businesses and workers require assistance to navigate a period where they cannot operate as usual. Thus, president of the ECB Christine Lagarde is likely to provide some commentary on the importance of providing fiscal stimulus akin to that being touted by US President Donald Trump.

A new targeted longer-term refinancing operation (TLTRO) aimed at funding small- and medium-sized businesses has been touted by some for this meeting, as the bank hopes to stave off a wider economic decline in the eurozone.

When it comes to traditional monetary policy, the ECB has little ammunition left after Mario Draghi handed that baton to Lagarde with rock bottom rates and an asset purchase programme of €20 billion per month.

Markets are currently pricing in a 100% chance that the ECB will cut rates by 10 basis points, yet this is largely a token gesture that is unlikely to make much difference to the economic picture. They do have the opportunity to raise quantitative easing (QE), which would be deemed a more dramatic move if undertaken.

Where now for the euro?

EUR/USD has been trending lower for the past two years, with the pair losing 14% over the two years into February's low of $1.0778. That wider trend appears to be over now, with the break through $1.1239 and $1.1412 serving to negate the creation of lower highs and breaking through the standard deviation channel.

That points towards the possibility of further upside to come. However, there is a major caveat here, with markets pricing in a 100 basis point cut from the Fed, we will soon see an end to the easing phase that has sparked this recent surge. From an economic perspective, the European situation looks bleaker given the current crisis in Italy.

With the stochastic rolling over, there is a possibility we will see a more bearish move come into play for EUR/USD. Perhaps the breakout we have seen for EUR/USD will ultimately drive the pair higher again.

However, this chart looks like we could see the pair roll over before long, with a huge amount of downside possible when we finally to see this recent surge unwind.

The recent decline has seen some of the recent ascent reverse, with a break through intraday trendline support providing us with a short-term move lower.

This certainly hasn’t given us a major reversal signal quite yet, and thus we could still see further upside over the short term, while markets await resolution of the ECB and Federal Open Market Committee (FOMC) stance. A rise through the $1.1402 level could bring about that next move higher, yet this will be worth watching for a potential shorting opportunity down the line if a reversal pattern comes into play after the Fed cuts once more.


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