There is a strong probability that the ECB will cut benchmark interest rates again on Thursday. A cut is priced in and should only weaken the Euro marginally in an immediate reaction. The Euro will, however, weaken sharply if the ECB announces a move to a quantitative easing. There will also be persistent fears over internal Euro-zone stresses. Given these fears, there is likely to be a reduction in long positions and the Euro is likely to trade with a softer bias into Thursday€™s ECB meeting. A retreat towards 1.3120 against the dollar is realistic over the next 24 hours.
The flash Euro-zone inflation rate fell sharply to 0.6% in March from 1.2% previously in data reported on Tuesday. The Wednesday data releases were also generally weak with German retail sales falling in the latest month while the final PMI index weakened marginally from the flash reading. In addition Euro-zone unemployment rose to 8.5% from a revised 8.3% previously.
There is still a very strong probability that the ECB will cut interest rates at Thursday€™s council meeting with the probability of 0.50% decline to a new record low of 1.00%.
Any comments on non-conventional policy measures will continue to have an important impact on Euro sentiment. A move to buying corporate bonds would be likely to undermine the currency sharply while the Euro will tend to gain support if the ECB resists the pressure.
G20 uncertainties, allied with uncertainty over the US auto sector is also likely to unsettle the Euro, but with heavy selling resisted.