Traders are closing profitable trades and taking profits. The market is going risk-averse in advance of tomorrow's ECB decisions concerning interest rates and monetary policies. Without any doubt, the June meeting is one of the most anticipated events this year for those who trade toe common currency. Despite the fact that most traders and investors are currently predicting an instant downtrend in the market of EURUSD after the ECB announces its decisions, the anticipated decline may not be the case.
Wall Street is waiting for the ECB to apply several instruments at a time. Mario Draghi is expected to announce several easing steps following the 2-day meeting, which ends tomorrow, on June 5th. The steps are definitely aimed at combating deflation. At the same time, the ECB is expected to bring the Euro a little bit down against the US Dollar in order to improve purchasing power and to stimulate growth. The currency pair has already started the bearish reaction in advance of the likely change in the ECB's monetary policy.
European stock indices are currently trading around their 6-year highs while the common currency is around 3-month and 4-month lows against the US Dollar and the Japanese Yen respectively. Apparently, most traders and investors are predicting a further downswing and therefore they are closing their winners.
According to the CNBC, Wall Street is predicting the use of 3 possible instruments:
This may be a short-term interest rate cut by 10-15 basis points coupled with an overnight rate cut down to a negative value in order to stimulate commercial banks in terms of lending to European companies
The next step may well be connected with pouring extra liquidity into the European banking system, maybe even through long-term LTRO refinancing: the ECB provides banks with cheap long-term loans in order to boost their liquidity and promote lending to businesses.
Finally, this may well be another round of quantitative easing or bond purchases aimed at cutting interest rates. This is the less likely scenario.
Quantitative easing is considered the most unconventional instrument in the ECB's hands.
This step is aimed at purchasing mostly Treasury bonds in order to boost the money supply. In this case, the ECB hopes that the financial institutions that emit and sell these bonds will get funds for them in order to use the funds to credit the European economy.
At the same time, such a policy leads to a higher sovereign debt, which pushes bond prices higher, thereby cutting their yields, thereby making the debt cheaper for further payouts.
If the ECB launches another round of QE and boosts the public debt the way the Fed did, the banks' balance sheets will boost as well. This will promote business and private lending, higher employment and spending coupled with lower risk of deflation.
At the same time, QE is likely to bring bond yields down, thereby helping the government to stimulate the economy, Market Leader reports.
EURUSD: Mid-Term Prospects
According to Masterforex-V Academy, the H4 chart of EURUSD is currently giving us a chance to define the near-term prospects in advance of the ECB's decision.
On June 3rd, the mid-term downtrend of EURUSD, which started from the 1,3993 high, suspended after multi-testing the 1,3585 support. The border of the descending MF sloping channel was tested and pinned trough without consolidating at the other side.
According to the rules of the new tech analysis introduced by Masterforex-V Academy, there are 2 likely scenarios:
EURUSD starts rallying within the scope of a bullish reaction or continues the downswing along the mid-term and long-term trends.
If the level of support remains unbeatable , we are likely to see a recovery above the MF sloping channel up to 1,3623, 1,3635 and 1,3649. The scenario is marked blue.
Alternatively, if the MF sloping channel (with probably strong supply) withstands the pressure, the price is likely to resume the downtrend to 1,3585 and 1,3562. The scenario is marked red.
