The currency market is anxiously awaiting the interest rate decisions from the Bank of England and the European Central Bank, which will be released tomorrow morning. The BoE is expected to keep rates on hold and say that it will continue the asset buying program, while the ECB is expected to reduce the key interest rate by 25 basis points.

Additionally, market participants anticipate that the ECB will introduce a new quantitative method, even though the market is still not sure exactly how, since the ECB cannot intervene in the government bond market as the other central banks do. Instead, the ECB members have repeatedly said that the bank is already adopting a quantitative easing method by providing unlimited funds to the European banking system. Most market participants do not consider this to be a quantitative easing method.

Over the past few weeks, a number of ECB members expressed their opinion that the lowest threshold in the Euro-area should be 1%, and anything lower would simply disrupt the inter-banking lending. If Mr. Trichet expresses this opinion tomorrow, the euro may receive a boost, Trade Team said. They also added that this might substantially improve the euro’s outlook over the medium and long term, if the recent positive global economic news reports are added to the equation.

On the other hand, it seems that the BoE has already reached the limits of monetary policy. The bank has limited room to further reduce the interest rate, if any, as the voting members saw strong deflationary pressure that threatened to “undershoot” the inflation target. 

However, Trade Team notes that in the November inflation report, the BoE forecast the CPI read to stand somewhere slightly above the 1% benchmark level, but the inflation gauge was release at 2.9% in March, and even rose a few basis points in February. Some analysts are arguing that the BoE decision was oversized, something that might cause strong inflationary pressures over the medium to long term, and will support the pound’s value.