It’s ECB decision day and it won’t be an easy task for ECB policy makers. The euro rose to a high of 1.0273 in anticipation of a bigger-than-expected rate increase today. Traders are now placing almost 50 percent odds on a half-point hike. And while we know that the market often gets ahead of itself, it may need to correct premature assumptions according to the old adage “buy the rumour but sell the fact”. There is another crisis looming in the EU: Italy’s government appears once again to be on the brink of collapsing. The markets would want to see Prime Minister Mario Draghi remaining in power because he brought stability to Italy. His departure could force the ECB to dilute or delay details of its new bond crisis tool. The tool is intended to curb unwarranted spikes in sovereign yields. If Draghi goes, Italian bond yields will rise on heightened political uncertainty. The political turmoil in Italy could thus complicate the European Central Bank’s efforts to raise interest rates for the first time in a decade.
How will the euro react?
The common currency will rise if the ECB raises interest rates by 50bp today while signaling a faster-than-expected pace of policy tightening. However, there is a risk that a bigger hike damages the ECB’s future guidance, a risk the central bank may be unwilling to take. Even in case of a euro rise, it will probably be limited.
The euro will fall if the ECB hikes by only 25bp.
However, the devil is in the detail, so we will brace for heightened volatility today and wish everyone good trades.
The ECB rate decision is scheduled for 12:15 UTC. ECB President Christine Lagarde is due to speak at 14:15 UTC.
EUR/USD: Potential SHS-pattern to predict upcoming losses?
As long as the euro trades below 1.0280, a head-shoulders-pattern could come into play as soon as the pair falls below 1.01. Another test of the parity level would be a next target for euro bears. The pattern becomes void if the euro breaks above 1.0275.
Disclaimer: All trading ideas and expressions of opinion made in the articles are the personal opinion and assumption of MaiMarFX traders. They are not meant to be a solicitation or recommendation to buy or sell a specific financial instrument.
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