The ECB may never use its last "patron" (We expect continuation of the consolidation of the EUR/USD pair and the prospective

Source: Forex Analysis

After a notable upward rebound over the past few days, the euro has paused in anticipation of the ECB’s final monetary policy decision.

Before the meeting of the European regulator on monetary policy, which will be held this Thursday, the mood in the expectation that the bank will make an unambiguous decision on new measures to stimulate the economy has changed markedly. The reason for this was the contradictions that opened up at the end of August among the representatives of the regulator regarding the need for these measures. These events have led to the fact that the opinions of market participants on this sensitive issue have radically changed. It seems that a significant number of investors have begun to doubt that the ECB will decide on broad stimulus measures and there are several reasons for this.

The first is a recent revival of inflationary pressures. The second is fraught with high risks of Britain’s uncontrolled exit from the EU, which really threatens this, while it is not clear. The third reason is the high probability of rising inflation in the long run in the wake of higher customs duties on trade between Europe and the United States. Recently, this topic has fallen into the background, closed by global trade contradictions between Washington and Beijing. However, it did not disappear, neither dissolve or disappear.

Assessing the developing tangle of contradictions between the representatives of the European regulator, as well as the influence of the above factors, we believe that the ECB can reduce the deposit interest rate to -0.50% from -0.40%, as expected after the result of its meeting. At the same time, they can also limit to only half measures to stimulate. In our opinion, such a decision is connected not only with the factors listed above but also with the bank’s possible desire not to use the entire incentive measure. That is, if the situation in the European economy does not stabilize and does not resume growth, this will cause a deep recession, which the ECB can no longer do anything substantial. The bank may not dare to use its last “patron”.

If such a decision is made, he should expect a resumption of growth in the euro. Recall that earlier it was the promises of the President of the ECB, M. Draghi, to expand incentive measures that caused the euro to depreciate in the foreign exchange markets. When implementing this scenario, the general sentiment in the markets can change significantly with respect to the total demand for risky assets since it was these prospects that supported and stimulated purchases of government bonds of economically developed countries and stocks of companies.

Forecast of the day:

The EUR/USD pair continues to consolidate in the range of 1.1015-1.1070 in anticipation of the ECB’s final monetary policy decision. We look forward to continuing the consolidation period today. We consider it possible to short sell the pair on growth from the upper limit of the range with the target of 1.1015. .

The USD/CAD pair is slightly correcting upward amid falling oil prices and expectations of decisions by the Fed and the ECB on monetary policy. Given the continuing general market sentiment to soften the monetary policies of these global securities, the pair may continue to decline and short sell the pair on growth from about 1.3190 with the target of 1.3100.

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The material has been provided by InstaForex Company – www.instaforex.com