The ECB faces a dilemma amid the coronavirus carnage and the weak response from leaders. Yohay Elam from NDDFX analyzes three mostly negative EUR/USD scenarios.
“No action: In case the Frankfurt-based institution leaves its policy unchanged and fails to pledge future action, EUR/USD would fall. This scenario has a high probability as the wind is blowing in favor of the hawks.”
“Waiting for June: During the next six weeks, Lagarde would have time to convince the hawks to go along. In that case, it is unclear if markets would be convinced, and the reaction depends on the language. The scenario has a medium probability.”
“Action now: If the bank announces an imminent enlargement of the PEPP, injecting more money into markets, governments could raise more funds and stimulate the economies. The mere announcement would send EUR/USD shooting higher, as markets do not price this low-probability option.”