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The outcome of the ECB meeting and the subsequent press conference by Mario Draghi are not fully anticipated, contrary to previous decisions.
So far, this uncertainty translates into very steady markets. This calm usually precedes a storm. But in which direction will currencies go? Here is a short and quick preview or cheat sheet if you wish.
The baseline expectation is that the ECB will not act.
Why leave policy unchanged?
Core inflation is still at 0.8%, above the 0.7% trough.
April inflation: The ECB and other analysts are certain that y/y inflation will pick up in April.
Keeping the powder dry: Extreme measures such as QE or negative interest rates will be kept for the worst times, and at the moment, the euro-zone is enjoying a recovery (somewhat fragile though).
Verbal intervention: The ECB successfully talked down the exchange rate away from 1.40. A strong exchange rate pushes inflation down and makes exports less competitive.
Why act anyway?
Headline inflation, the ECB’s central mandate, fell to 0.5%, the lowest since 2009. This puts a lot of pressure on Draghi.
Others’ experience: Japan didn’t see signs of deflation until it was too late.
Hints: Some ECB officials talked about more readiness for action.
EUR/USD: The exchange rate is high: 1.40 seems to be the line in the sand, but will the ECB act to push EUR/USD further away from the danger zone?
4 scenarios
Towards the decision, EUR/USD is trading in a narrow range between 1.3750 and 1.3770. The 20 pip range can turn into a 200 pip range.
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