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ECB meeting preview: strategic review key for ECB

Strategic review in focus for the ECB, with markets pricing an outside chance of another rate cut.

When and where?

The first European Central Bank (ECB) meeting of 2020 will take place at their Frankfurt headquarters on Thursday 23 January.

Will we see any change to ECB rate or QE?

With this meeting representing the second rate decision from ECB President Christine Lagarde, there have typically been few reasons to expect any fireworks on Thursday. With rock bottom rates and monthly quantitative easing (QE) purchases, there have been few that expect to see any move from the committee this month. Inflation has been on the rise, with the headline figure rising to 1.3%. That represents the joint highest rate since March 2019.

Nevertheless, markets are currently pricing in a 25% chance of a rate cut on Thursday, perhaps pricing in a distinct lack of confidence that the US-China trade deal will do anything to drive a recovery for export heavy nations such as Germany. While that deal helped boost US exports, it looks unlikely to do much to spark a resurgence for global growth levels outside of America. Therefore, questions will be asked over how to best drive growth within the eurozone, with the committee likely to recognize that there is little left that the ECB can do. Instead the focus will likely shift fiscal policy considerations.

What about the strategic review?

The meeting will see the ECB kick off a hugely important strategic review. We will be on the lookout for a whole host of factors, largely related to the timing and scope of the review. One of the most important parts of this review comes in relation to price stability, with the ECB hoping to better define what their target should be and how to measure it. For the most part, we are looking for the inflation target to shift to a more flexible target band.

Where now for the euro?

EUR/USD is regaining ground ahead of the ECB rate decision, with the pair extending higher after an inverse head and shoulders formation. Coming off the back of a recent decline, there is a good chance that we are seeing a retracement here rather than an all-out recovery.

​Despite the break below $1.1085 this week, we remain above the critical $1.1066 support level, which must be broken if we are to reverse the recent fourth quarter uptrend. Looking at the long-term picture, this downtrend is expected to return soon enough, and thus it makes sense to watch for a break below $1.1066 to bring about a wider bearish picture. Until then, this rebound looks likely to falter unless we see a break through the $1.1172 level.

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