Euro Hits 2-Month Lows, How To Trade ECB

Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup July 23, 2019

On the eve of one of this year’s most important European Central Bank , the is trading at a 2-month low versus the US dollar. The single currency broke below 1.12 overnight and extended its losses during the NY session. While everyone is talking about the prospect of an in the US, the ECB could also lower interest rates. Typically they like to prepare investors for major changes, which is why they are expected to take the major step of altering their forward guidance this week.

The ECB could easily add accommodation in July but based on changes in the economy since their last meeting, they have the flexibility of waiting until their economic projections are updated in September. Business sentiment is down and weakened but is up, the improved and ticked higher. With that in mind, the overall outlook is still grim. Low inflation is a serious problem for the central bank with CPI hovering around 1.3% in the Eurozone. growth of 0.4% is also well below trend and the threat of tariffs on Europe could dampen the outlook further.

A number of economists are looking for a September but the central bank could be more aggressive opting for a package of accommodative measures that includes asset purchases and a deposit-rate cut. Technically, the has completely broken down. If the ECB is sufficiently dovish, the pair could break its 2-year low of 1.1106. However if they sound noncommittal in any way, it will set the stage for a massive short squeeze in EUR/USD ahead of next week’s , where the Federal Reserve is expected to lower interest rates for the first time since the global financial crisis.

The traded higher against all of the major currencies despite lower .The was the worst performer, followed by the . fell as well but mostly due to a softer than Boris Johnson’s confirmation as Prime Minister. The market has discounted his victory and took his comment about sticking to the October 31 leave date in stride. With that in mind, the lack of concession in Johnson’s voice could make the weeks ahead difficult for sterling.

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