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Forex: Markets expect action from ECB

All eyes of the ECB today and one can’t help thinking “we’ve been here before”. It seems that in the run up every ECB meeting in the past few years, in fact ever since Mario Draghi said famously that he would do “whatever it takes”, there’s been a build-up of expectation that something major will be announced in a bid to halt the deflationary spiral. Many are saying this time is different now as Eurozone inflation teeters on the brink of deflation, but investors have to be prepared for disappointment. Needless to say the tone of the press conference today is likely to be very dovish and what will be closely watched is the ECB’s inflation projections to see how much they will lower them. This is important as at some point, as projections get lower and lower, Draghi will have to start to walk the walk as he continually talks about having all available instruments at his disposal to ensure euro stability.

There’s a small possibility we will see further cuts to the deposit and refi rate, but full blown QE is unlikely to be announced, rather the chances of some sort of ABS program are higher. The reason markets could be disappointed is because the ECB is about to undertake its TLTRO program in a couple of weeks, with the second round in December and the effects of that have not been felt yet. Regardless of what is done and said, come the decision today and proceeding press conference there is likely to be considerable volatility in the euro.

There’s also the Bank of England rate decision today ahead of the ECB but nothing exciting is expected from them and of course we will not see the vote determining today’s action until the minutes are released on 17th September. GBPUSD is holding the 1.6450 level and has now corrected 4% from its July highs. Despite having been oversold on some technical indicators for some time now the near term trend doesn’t look bright for cable and bears will be targeting 1.6250.

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