Euro’s Path of Least Resistance May Be Lower Around ECB Meeting

(Bloomberg) --

The euro may be in for more weakness in the coming days, regardless of the European Central Bank’s response to economic risks from the coronavirus.

Should the institution take a cue from U.S. and U.K. peers and cut interest rates aggressively, a likely re-widening of dollar-euro yield differentials should weigh on the common currency. If, instead, the ECB chooses to hold rates and try alternative easing tools, the euro may get sold off on concern that the central bank has run of room to add sizable stimulus.

For the shared currency to rally, not only must the ECB fully meet market expectations, but a viable prospect of fiscal stimulus also may be needed.

Money-market pricing reflects bets that the Governing Council will cut interest rates by 10 basis points on Thursday, following emergency easing moves from the Federal Reserve and the Bank of England. Alternative stimulus steps such as more generous long-term bank loans are also expected, while an expansion of the ECB’s asset-purchase program cannot be ruled out.

With German politicians still seen as reluctant to unleash big stimulus, the euro may have set a short-term top at $1.1495, Monday’s high. The currency gained 0.3% to $1.1317 Wednesday, following a 1.5% drop on Tuesday. Option bets earlier this week showed investors were the most bullish on record on the euro, yet the rally since mid-February has been so sharp that a strong pullback could be imminent.

Technically, the first key level to the downside is $1.1239, the Dec. 31 high, which is the breakout point of the March rally.

• NOTE: Vassilis Karamanisis an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Anil Varma, Neil Chatterjee

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