Later this morning, the European Central Bank (ECB) will report its game plan in regards to accelerate growth in the eurozone and issue forward guidance. ECB President Mario Draghi could issue negative deposit rates, which has seen support from a few ECB officials, in hopes to spur near non-existent bank lending. Another is to cut the benchmark rate further, marking an all new historical low.
According to the International Monetary Fund (IMF), the ECB should cut interest rates further and combine it with either more long-term refinancing operations (LTRO) or conduct a Bank of Japan-esque all out asset purchasing program.
The central bank also has to communicate on the low inflation that has infected the region. Consumer prices have remains dangerously low for an extended period of time and below the “danger zone” of one percent as labeled by the ECB for five months. The lack of growth needs to be addressed more aggressively, in my opinion. The official unemployment rate has been at least 10 percent or higher for over three years and at least 12 percent since January 2013. There is an issue with that as two highest, and four out of the top nine, unemployment rates on the global. (Greece, Spain, Portugal, and Italy. The collective eurozone is ranked tenth, according to tradingeconomics.com).
Low inflation is a double-edged sword. On one edge, low consumer prices can be beneficial for consumers and seen by some economists as positive. It causes less strain on the middle-class pockets. On the other edge, it kills growth of businesses. Long periods of low inflation can be very detrimental for an economy’s overall growth. Reza Moghadam, head of the IMF’s European Department, said “You can have too much of a good thing, including low inflation.” He continues “Very low inflation may benefit important segments of the population, notably net savers. But in the current context of widespread indebtedness problems, it is working to the detriment of recovery in the euro area, especially in the more fragile countries, where it is thwarting efforts to reduce debt, regain competitiveness and tackle unemployment.”
Trading the decision:
EURUSD has been trending lower and treading water above 1.3700. Draghi’s decision has been up in the air. Some analysts believe it will be more of the same, talk, talk, talk. However, as the poor data continues to trickle in, other analysts believe Draghi must act or consequences will occur.
Price action is well off the 30-day high of 1.3823 and has remained well underneath the dominant descending trend line. Event risk can be tricky to trade because the pair’s direction will be sharp and be a collective subjective outlook that may differ from the individual trader. So, it is important to see where the initial price trends prior to placing an order on just the headline.
The descending triangle’s support is at 1.3720 with additional support at 1.3690, and a break and close below will signal further downside. Look for an initial target of 1.3665 and 1.3640.
In the bullish case, a break and close of the trend line will signal a move to price action resistance 1.3770 before testing the 30-day high.