Will This Week’s ECB News Disappoint?

December 9, 2020 at 10:12 PM

Later this week, the European Central Bank (ECB) will meet, and it is widely expected to deliver more easing.

As the ECB previously said, it is ready to unveil more stimulus. The stimulus has to be really big. The consensus looks for a 500 billion EUR addition to the PEPP Quantitative Easing (QE) program and a 6-month extension until December 2021. Some analysts and economists forecast a 6-month extension of the QE program. 

All rates should be left unchanged, while the fresh economic and inflation projections are expected to be lower than at the central bank’s latest meeting. 

However, since everything is already priced in and the EURUSD pair is rising anyway, the market could be headed toward a big disappointment. That happens when the central bank delivers only what is expected and does not surprise the markets with more dovishness.

Should that happen, the EURUSD pair could shoot toward the 1.25 level, which is a key resistance pivot. 

Additionally, everybody knows that a stronger euro is causing pain for German and other exporters, especially in times of a global crisis. The question then shifts to the following: what is the ECB going to do to stop the euro from appreciating further?

That is why the ECB should surprise the markets this week and either further enlarge the QE program, ease other monetary conditions, or basically start with the well-known helicopter money. 

Since the Federal Reserve (Fed) is forecast to announce more easing later in December, inflation is on the rise, and real yields are negative, the greenback has zero reasons to strengthen.

So far, the long-term trend for the EURUSD remains bullish, as long as it trades above 1,20/1.18 and the battle of central banks is only just beginning. We will see what central bank debases the currency more and wins this fight. 

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