- EUR/USD holds in bullish territory in the 1.12 handle ahead of the ECB.
- ECB seen to take specific action while fiscal manoeuvre in the Eurozone remains constrained.
EUR/USD has travelled from a high of 1.1366 to a low of 1.1257 on the day as the markets get set for the Europan Central Bank on Thursday. Markets look to see how the ECB will respond to the strength in the single unit and the numerous easing by fellow central banks around the world seeking to stave off a global economic downtrend pertaining to the coronavirus.
EUR/USD rallied from a low of 1.0777 to a high of 1.1495 in the unwind of the carry trade in an exodus of EM-FX on fears of the contagion of the coronavirus to all corners of the world. We have seen a series of central banks respond in kind, with the Federal Reserve and the Bank of England both cutting by 50 basis points in an inter-meeting emergency decision. The Reserve Bank of Australia had also cut rates by 25 basis points with little room to go until the prospects of QE.
ECB to take forceful/specific action at tomorrow’s Governing Council meeting?
The ECB is now expected to show a more forceful/specific action at tomorrow’s Governing Council meeting. In addition to a rate cut, markets now expect the CB to unveil liquidity measures in bridged loans targeted at SMEs. However, an emphasis on fiscal stimulus will also be expected. However, as analysts at Rabobank warned, “fiscal manoeuvre in the Eurozone remains constrained by the deficit rules and several countries are facing little or no fiscal space, at least from a medium-term perspective.”
On the other hand, ECB President Lagarde is known to be a politician and this is where her skills will come in very hand and early on into her premiership, using her powers to persuade EU leaders into a broad commitment which, in turn, could enable the central bank to come with “a more decisive response tomorrow to address economic concerns and market tensions,” the analysts at Rabobank argued.
“According to people ‘familiar with the discussions’, the ECB President warned that without coordinated action, Europe “will see a scenario that will remind many of us of the 2008 Great Financial Crisis”, adding that the ECB are “looking at all tools particularly ones to provide super-cheap funding and ensure liquidity and credit don’t dry up.” This fits with our view that ECB-financed SME loans, accompanied by a call on governments to back these loans by guarantees, is one of the ways forward,”
analysts at Rabobank explained.