ECB to Announce a Rate Cut?

FX Strategy Articles > FX Trading Tips

Wait and see. That's pretty much the approach traders have taken so far this week prior to the ECB's interest rate decision that will be announced a few minutes from now.

The EUR/USD pair, for example has moved sideways along the 1.315 mark this week. This brings the pair back to where it was two weeks ago when it defied expectations of a drop after Germany announced a disappointing economic data, with opposite news from the US economy. It went through a massive correction after that, which dropped the pair to 1.300.

However, whether the ECB would take a similar approach with the interest rates has yet to be seen. Analysts forecast a 25bps cut from 0.75% to 0.50%, with another round of cut seen next month. Basis for the cut is mainly on the continued poor performance of the Eurozone's economy. For example, the region's inflation rate is well below the 2% target.

The EMU also announced earlier its PMI figures, which dropped slightly from 46.8 to 46.7, contrary to the consensus of 46.5. Italy rose from 44.5 to 45.5, while Spain rose from 44.2 to 44.7, and Greece from 42.1 to 45. Germany, meanwhile, dropped from 49.0 to 48.3.

Not all analysts, however, think that the ECB would announce a rate cut just yet. This is based on Governing Council member Klass Knot's statement that the ECB should be careful about cutting rates because it already running out of options. Aside from that, rate cuts might be seen as a negative on the European economy, which would drag down investor confidence even lower than it already is.

So a few minutes prior to the ECB's announcement, waiting and seeing are all traders can do for now. Whether the EUR rallies or dips depends on whether the ECB decides to continue adapting the wait and see approach or to cut rates despite this move being seen as a desperate one.

By FX Strategy Team, Published on 2nd of May 2013
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