The focus among traders today will be on the European Central Bank (ECB), which will announce its interest rates decision later today. The bank is expected to leave rates unchanged, with the deposit facility rate at minus 0.4% and the marginal lending facility at 0.25%. The central bank is widely expected to lower the growth forecast for the third time this year.
The bank has a number of key concerns. First, the EU economy has strongly relied on exports for growth. However, as the global trade gets interrupted by the war between United States and China, there are concerns that this may affect the growth. Indeed, the effects are already being felt. The economy grew at a four-year low of 0.2% over the third and fourth quarter of 2018. This sluggish growth appears to be continuing this year.
Second, the key countries of the EU are having their own problems. Italy is in a recession. Germany, the key engine of the economy avoided a recession narrowly in the fourth quarter. Spain and France are going through political uncertainties, which could hinder growth. Other smaller countries like Greece are not doing well either.
Third, the global economy is not doing well either. Yesterday, OECD became the latest organization to lower the global growth forecast. The organization said that the economy could grow by 3.3%, which might be lower than the previous forecast of 3.5%. Fourth, there is a major risk of a no-deal Brexit, which will lead to more problems for the region.
While most traders expect the bank to reduce the forecast in a big way, there are hopes that this may happen. This is because the members of the ECB believe that the slowdown in the economy is a soft patch and not an extended slowdown that has the potential to last years. This confidence is because of the strength of the labor market, with the unemployment rate at the lowest level in more than a decade. This has led to a slight increase in household spending, which may mitigate the impacts of smaller exports. Another reason is that increased government spending can help to spur growth. Additionally, the bank intends to continue reinvesting 15 billion euros every month in the region’s bond market as part of the reinvestments of the 2.6 trillion QE program. These measures may help spur the economy. Another option at the table is the Long-Term Refinancing Operations (TLTROs), which could provide cheap financing to the region’s banks.
Ahead of the ECB’s decision, the EUR/USD pair remains close to the lowest level since February. Yesterday, the pair reached a low of 1.1285, with the pair being in consolidation mode. This is confirmed by the narrow Bollinger Bands, while the RSI has remained at the 50s. The pair is looking like it could be very active today and tomorrow as traders receive the ECB statement and US jobs numbers.
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