The ECB is expected to cut interest rates 50 bps to a record low 1% in reaction to falling EU inflation and deteriorating EU economy. The ECB has cut interest rates 275 bps since last October. The ECB is also expected to cut its refinance rate 25 bps and lengthen the maturity of ECB refinancing operations to up to twelve months. The ECB may also announce a plan to buy private sector bonds. The purchase of private sector bonds would bring the ECB closer to quantitative ease. The ECB has been reluctant to implement quantitative ease choosing to focus on the bank lending. The ECB's reluctance to implement quantitative ease reflects the ECB's concern about the difficulty in assessing the impact of it. Quantitative ease could be inflationary and countries like Japan who have tried quantitative ease have not been very successful in boosting liquidity and growth. The jury is still out on how effective quantitative ease by the Fed, SNB and BOE may be. In addition, the EU does not have a unified or deep bond market and banks play a bigger role in providing credit then security firms. Hence the ECB prefers to rely on the refinance rate to try and boost lending activity .The initial reaction to the BOE, SNB and Fed's quantitative ease was selloff of the GBP, CHF and USD. The initial sell off in these currencies was short lived and we suspect the reaction will be similar for the EUR. Note in the graph below the EUR may be forming a bull flag formation and is holding above key support at 1.3095 which is 50% of the 1.2460-1.3775 Q1 09 range.